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Tuesday, December 2, 2008

G. G. Bain Smoking Consul 1909 Peter, famous monkey of the Parisian music halls, was an act at Oscar Hammerstein's Paradise Roof Garden in New York. As the subject of "Consul Crosses the Atlantic," he was also the first chimp movie star.

Ilargi: The one and only institution whose official job it is to gauge US recessions and depressions, the NBER , National Bureau of Economic Research, reported yesterday that the US has been in a recession since December 2007. And yes, I do wonder why it took them a year to reach that conclusion, but many other things are more important. For one thing, this report speaks volumes, once more, about the extent to which the US government, which still denied a recession existed as late as last month, cooks its numbers, but it says something else as well. This will be the longest recession in more than 40 years. You're not going to find a single sound soul to predict it will be over by March or April. But many will still maintain that it's just another recession, and we've been through many of those and came out stronger and all that blubber talk. This one will be counted in years, not months.

So let's see, what advantages have the federal lies, cooked books and hedonistic statistics had for the country and the citizens so far? Exactly, none. And I would venture that the NBER knew this well before the election. Its co-director is Christina Romer, who now features prominently on Obama's finance team. Think she didn't tell him back in October? If she did, why was he silent during the campaign? And if he was, what are the chances he'll start being honest now? He's losing me more every day, I for one do remember Hillary's war-mongering rhetoric, and no, she does not belong where she is right now. The world we're entering will be far too volatile for someone so obviously suffering from a severe case of estrogen imbalance.

The Japanese yen rises, and not just a little bit. The result: the Bank of Japan panics, with the government in tow. Ironically, a stronger currency is a death threat for the Japanese economy, and not only because it's built on exports. The demise of the carry trade will mean murder in the financial world around the globe -it has for 20 years just about single-handedly fueled international trade with free credit-, but Japan will of course be hit the hardest, followed closely by the US, which can look forward to fast plunging Japanese purchases of Treasuries and other US debt. Japan interest is at 0.3%, with no option of going lower. Well, yeah, you can try, as the US will, but that can only end in utter disaster. Keep watching.

On top of that, expect Japan to be forced to sell ever more of its huge pile of existing foreign reserves. You ain't seen nothing yet when it comes to credit contraction, we're only just beginning. And when credit contracts, so do exports. With that in mind, it's easy to tick off the victims: the countries that rely most on customers abroad. No. 1 on that list must be China, where 2009 will be a year of ugliness, in many shapes and forms.

My 4-year old prediction of civil war in China by 2015 may have to be moved up yet again. If China’s economic growth goes down to 5%, the economy and the political system are going going gone and out of here. These newly built export economies are just too vulnerable, no resilience. Put Russia down as a close second, and reserve a space right behind for many developing countries. Other, more established, export powers to meet the hammer are for instance Germany, Holland, Brazil, Austria, Belgium and Australia. Job losses will be staggering, and I don't see any of these places seriously preparing for it. It’s all blind growth religion. They should all take a good look at the Baltic Dry Shipping Index, which is approaching 600, from 200.000+ a few months ago. That, my friends, spells bleak and empty shelves coming to a place near you. Around January 20.

In the US car industry, including the Big 3, production overcapacity will be about 50% by mid-2009, if sales keep plummeting the way they have. Which they undoubtedly will, if only because no bank will lend you money for a car. Since US carmakers are less efficient in just about every facet of the game than their Japanese and European counterparts, they likely need to cut more than 50% of capacity to get back to a "normal", balanced, supply and demand picture. While Toyota presently can be profitable with total sales of 12 million vehicles, GM needs 15 million sold, and much of that SUV’s, where profit margins are much higher. But US car sales won't return to 15 million in many years, if ever, and SUV’s are dead. So what do you think will happen?

Another overcapacity issue for the domestic US car industry is found in dealerships and franchises. For instance, GM's number of sales points, compared to Toyota, is much higher. 5 times more dealers, and 10 times more franchises. Closing them will cost money to the carmakers (franchise laws say so), as well as hundreds of thousands of jobs.

“G.M., for example, has about 6,700 dealers in the United States, compared to 1,200 for Toyota (the disparity is even greater when franchises are counted — G.M. dealers operate 14,000 franchises for its many brands, compared to 1,600 franchises for Toyota).”

Today in Congress, the non-flying out-of-touchmen will announce closing brands, but that is very costly and takes forever. The decision to shed Oldsmobile in 2000 cost over $1 billion, and wasn’t completed till 2004. So what else is there in store? GM needs to close 5000 dealerships and at least 10.000 franchises in the US alone. If 25 people on average work at each of these, that's a potential loss of 375.000 jobs. Since Ford and Chrysler will require similar cuts, it's not too far out there in left field to suggest 600.000 jobs will be gone just from dealers, just the ones that sell American cars. That's before even one additional job has been cut in the factories. Or before Toyota and Honda start their inevitable rounds of cutting jobs in the face of dwindling sales. Or before the parts makers start pining for the f(j)ords.

Overall new car sales are down an estimated 27%, with US cars dropping an estimated 33%. The mess is so convoluted and so opaque that there is only one solution: let the markets handle it. Whatever the government does will fail. But I'd guess they'll do something anyway: hand over perhaps $10 billion in order to save the industry till January, without much in the way of a serious rescue plan. If Obama lets that happen, he's a nut, because he will then have to pull the plug next year or the one after that, and be known for the rest of his life and through history as the president who failed America's pride and pushed 5+ million Americans out of a job. And don’t get me started on the infrastructure maintenance jobs he's talking about. Something tells me the wear and tear on US roadways is about to become much less of a problem. Meanwhile, who in Detroit will still have a pension and health benefits?

US consumer spending drops rapidly, very rapidly. My admittedly oversimplified interpretation of today's Reuters data points to a dismal trend. Same store sales excluding WalMart are down 7.1% in the past year. If that is combined with the fact that consumer spending makes up 71% of US GDP, the trend, if it were to continue and/or worsen -and there is no reason whatsoever to believe it will not-, indicates that a 5% plunge in 2009 GDP could well be in the works. This wouldn't surprise me at all, of course, but for many others it would be news. For that matter, I wouldn't be surprised to see US GDP fall 10% in 2009, and to have unemployment rise by the same margin, to somewhere in the high teens.

Retail sales, like automobile purchases, can now only be salvaged through the availability of credit. Save your economy by putting your neck deeper in the debt noose. Nobody owns anything anymore, except for rusty vehicles, leaky homes and underwater mortgages. Now if I were a bank, would I provide credit to people with that sort of collateral?

Whatever money the citizen still might have had left has been handed out to the banks, who hoard it all to shield themselves against upcoming writedowns already in the pipeline, but are somehow supposed to lend it out to the same citizen, whose only remaining collateral for the loans has just been handed to the banks, who are somehow supposed to lend it out to the same citizen, whose only remaining collateral for the loans has just been handed to the banks, who are somehow supposed to etc. etc., ad infinitum. Wait a minute, that looks like a.....

Perpetuum mobile, dreamworks and religion all in one, an ideal fit for the 21st century American society. Until it's time to take down the Christmas decorations. Then a cold wind will come blowing from the North Pole, and you're going to wish you'd have found a nice warm sweater under the tree. Or a job.

The Federal Reserve extended the term of three emergency-loan programs to April 30 from January 30, aligning their expiration dates with other central bank efforts to mitigate the credit crisis. The Primary Dealer Credit Facility and Term Securities Lending Facility, created in March, and the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility, begun in September, were lengthened “in light of continuing strains in financial markets,” the Fed said today in a statement in Washington.

The three loan facilities, part of the central bank’s efforts to cushion financial markets from the worst crisis in seven decades, had about $304 billion in loans outstanding as of last week. The Fed already authorized other programs through April for supporting the commercial paper market and money-market funds and for swapping dollars with 14 central banks.

“Judging the effectiveness of the Federal Reserve’s liquidity programs is difficult,” Fed Chairman Ben S. Bernanke said in a speech yesterday. “Obviously, they have not yet returned private credit markets to normal functioning. But I am confident that market functioning would have been more seriously impaired in the absence of our actions.” The primary dealer facility, or PDCF, provides loans to Wall Street bond dealers. The Fed added programs in September special to three dealers: Goldman Sachs Group Inc., Morgan Stanley and Merrill Lynch & Co. Lending totaled $57.9 billion as of Nov. 26.

The Fed created the PDCF at the time of the near-collapse of Bear Stearns Cos. in March. The rate on the loans is 1.25 percent, the same as the discount rate for commercial banks. The Term Securities Lending Facility, or TSLF, auctions loans of Treasury securities to the same bond dealers in exchange for collateral such as mortgage-backed securities. Lending totaled $193.2 billion as of Nov. 26.

Under the money-fund commercial paper facility, the Fed offered loans to banks to buy asset-backed commercial paper from the mutual funds, which were beset by redemptions in September. Loans under that program fell to $53.3 billion on Nov. 26 from $61.9 billion earlier and a peak of $152.1 billion on Oct. 1. Fed officials have said they plan to wind down the programs when the crisis eases. In July, the central bank extended the PDCF and TSLF through January. Bernanke said yesterday that “once financial conditions become more normal, the extraordinary provision of liquidity by the Federal Reserve will no longer be needed.”

Goldman Sachs Group Inc., known for avoiding many of the blowups that have battered its Wall Street rivals, now is likely to report a net loss of as much as $2 billion for its quarter ended Nov. 28, according to industry insiders. The loss, equal to about $5 a share, would be more than five times as steep as the current analyst consensus for the Wall Street firm, as it faces write-downs on everything from private equity to commercial real estate.

Though analysts and investors already were bracing for Goldman's first quarterly loss since it went public in 1999, the pessimism has grown sharply. "The last two weeks have been nothing short of horrible, with asset prices coming under ever more pressure than before," said Susan Katzke, an analyst at Credit Suisse Group, who on Monday reduced her Goldman estimate to a fiscal fourth-quarter loss of $4 a share. Previously, she projected a profit of $2.47 a share. Goldman is expected to report its financials in a few weeks.

On a day when financial stocks fell sharply, Goldman's shares plunged $13.23, or 17%, to $65.76 in New York Stock Exchange composite trading at 4 p.m. The stock is down 69% this year. Beyond the damage caused by day-to-day market turmoil, Goldman is struggling to find its way in the new Wall Street, where the sort of risky bets the firm mastered as it was piling up record profits just a year ago are being curtailed. As it reduces its risk and behaves more like a traditional bank in order to secure more-reliable financing, Goldman also faces one of the biggest cultural shifts in the firm's 139-year history. Amid the financial crisis, Goldman has registered as a commercial bank.

One area that is thought to have given Goldman particular problems in the just-ended quarter is its "book" of so-called distressed investments. Over the years, Goldman has invested in everything from troubled auto loans in Thailand to the debt of a liquor maker in South Korea to struggling golf courses in Japan. This business was once a big profit center. It isn't known whether these specific investments contributed to the write-downs in this portfolio, and Goldman doesn't disclose the size of its book of distressed investments, which is housed in its fixed-income department.

But the business is substantial. In 2005, a blowout year for the group, Goldman bet $24 billion of its own money on this type of investing, according to people familiar with the matter. Ms. Katzke of Credit Suisse said while the size of Goldman's real-estate and leveraged-loan investments is relatively modest compared with most rivals, the values have fallen steeply in recent weeks. Leveraged loans are loans typically issued by companies with "junk" credit ratings.

Goldman also is facing write-downs on its 2006 investment in Industrial & Commercial Bank of China. Goldman had made nearly $2 billion in paper gains on this investment at one point. But ICBC's stock fell by almost 28% in the Goldman's fiscal fourth quarter, and this alone could result in a write-down of about $700 million. Goldman's challenges illustrate a broader malaise that has hit financial firms, ranging from banks to insurers, in the fourth calendar quarter, at a time when financial markets were supposed to be thawing. Instead, they've faced a combination of forces, ranging from the Treasury Department's decision not to buy troubled assets from banks after all, to a continuing lack of trading in mortgage securities.

A number of bank analysts have highlighted the growing pressures on financial firms amid a steep and unexpected fall in prices of all kinds of assets. In a report last week, Oppenheimer & Co. analyst Meredith Whitney said that big U.S. banks, including Citigroup Inc., Bank of America Corp. and Goldman, face tens of billions of dollars in fresh write-downs and loss provisions. Representatives of Citigroup and Bank of America declined to comment. The pressure has increased partly because of credit-rating downgrades on risky assets. These require banks to set aside more regulatory capital. In late November, Standard & Poor's downgraded scores of residential mortgage-backed securities, most of them backed by subprime mortgages and a somewhat less-risky kind called Alt-A.

According to the Oppenheimer report, some $744.7 billion in mortgage-related assets were downgraded in October by the three main credit-rating agencies. That was about 16 times the amount downgraded in August 2007, a month seen as a starting point to the credit crisis. In total, some $1.2 trillion of mortgage assets have been downgraded so far in the fourth calendar quarter. It's a worrying sign because it means that some capital raised from taxpayers and investors in the U.S., U.K. and throughout Europe is being used simply to shore up balance sheets, rather than to lend. One problem: Investors and financial firms had assumed the $700 billion Troubled Asset Relief Program would establish a buyer of last resort for banks' toxic assets. When the buyer disappeared, as the U.S. Treasury changed its rescue strategy to one of direct cash injections, values of many assets fell.

At the same time, efforts to help homeowners through loan modifications are so far failing to stem the housing decline. Home prices dropped 17.4% in September from a year ago, according to the S&P/Case-Shiller index, whose data are published with a two-month lag. This hurts the prices at which foreclosed homes can be sold, in turn affecting the values of securities backed by mortgages. And those depressed prices, in turn, weigh on the values of debt pools known as collateralized debt obligations. CDOs remain on the balance sheets of many banks in the U.S. and Europe.

Many CDOs also hold commercial real-estate debt, another asset class that has incurred record price declines in recent weeks. Many banks and financial institutions hold large volumes of loans used to finance office buildings, shopping malls and other properties, or securities backed by these commercial mortgages. Triple-A-rated commercial-mortgage-backed securities lost 22% of their value in the past three months. They now trade at around 73 cents on the dollar and yield more than 10 percentage points higher than Treasury bonds. Banks are also likely to take hits in the current quarter from holdings of corporate debt and their remaining exposure to beleaguered bond-insurance firms, whose financial-strength ratings were downgraded further by major credit-rating services in the past few weeks.

The latest downdraft in the credit markets, a rise in company defaults, and pressure on some investors to sell more assets have pushed down the prices of corporate leveraged loans and of complex debt instruments that own these loans. In addition, the cost of insuring against default on corporate bonds and loans via so-called credit-default swaps has soared to record levels, making it more expensive for banks to hedge their investments. "Write-down pain is certain" for the banks, said John Sprow, a money manager at Smith Breeden Associates in Boulder, Colo. He added, however, that "the risk is under control" for bond investors who own debt issued by the banks, in part because the banking system is now partially nationalized.

The Bank of Japan will accept lower- grade corporate bonds as collateral for loans to banks to help businesses get access to funds as the country’s recession deepens. The central bank will begin accepting BBB or higher-rated corporate debt on Dec. 9 and will start a new lending facility for commercial banks in January, it said in a statement after an emergency meeting today in Tokyo. The policy board kept its overnight lending rate at 0.3 percent.

The cost banks charge each other for three-month loans in Tokyo today surged to the highest since Japan’s credit crunch a decade ago. With benchmark rates approaching zero in Japan and the U.S., Governor Masaaki Shirakawa and Federal Reserve Chairman Ben S. Bernanke are adopting other ways to support their economies. "The Bank of Japan is trying to use all available tools to revive the economy and ease concerns in the market," said Hideo Kumano, chief economist at Dai-Ichi Life Research Institute and a former central bank official. "It remains to be seen how effective today’s measures will be" in easing credit, he said.

The steps are aimed at encouraging banks to purchase and underwrite a wider range of corporate debt that they would then use as collateral for borrowing from the central bank. Lending to banks will increase by about 3 trillion yen ($32 billion) once both measures take effect, Shirakawa told reporters today. "It’s only liquidity support for banks, not the companies themselves," said Tetsushi Nagato, a credit analyst at Schroder Investment Management Japan Ltd., whose parent manages the equivalent of $204.5 billion. "We can expect the downturn to last for a long time." The central bank said it will provide funds to commercial lenders at the benchmark rate "for an unlimited amount against the value of corporate debt pledged."

The types of debt accepted include bonds, commercial paper and discount bills. The policy board will discuss more details of the plan at its Dec. 18-19 meeting and aims to implement it in January. Today’s measures will be in effect until April 30, helping banks get enough cash to accommodate companies’ demands for money for settling accounts at the end of the calendar and fiscal years. "We expect the announced measures will encourage commercial banks to lend more and activate trading of corporate bonds and commercial paper in the credit market," Shirakawa said. Global credit markets seized up after the bankruptcy of Lehman Brothers Holdings Inc. on Sept. 15, spurring governments and central banks around the world to bail out financial institutions and pump cash into money markets.

Australia’s central bank slashed its benchmark interest rate by one percentage point to 4.25 percent today, extending the biggest round of reductions since 1991. Fed Chairman Bernanke said yesterday that he has "obviously limited" room to lower the 1 percent rate further and may buy Treasuries to revive the economy. Shirakawa said yesterday that Japanese companies’ access to funding is deteriorating "at an accelerating pace." Yields on corporate bonds are climbing at a pace "comparable to that in 1998 and 1999," he said. The collapse of Long-Term Credit Bank of Japan Ltd. and Nippon Credit Bank Ltd. a decade ago prompted other lenders to hoard cash, cutting off funds for businesses and triggering a wave of bankruptcies in a pattern that’s being repeated this year. Some 30 publicly traded companies went bust in 2008, the most in the postwar era, according to Teikoku Databank Ltd.

"The Bank of Japan probably wants to avoid the situation in which healthy companies would go bankrupt just because of funding problems," said Masafumi Yamamoto, head of foreign-exchange strategy at Royal Bank of Scotland Plc in Tokyo. Lending between banks has tightened even after the central bank’s Oct. 31 decision to cut its key rate to 0.3 percent from 0.5 percent. The three-month Tokyo interbank offering rate, or Tibor, rose to a 10-year high of 0.893 percent today.The Bank of Japan currently accepts A-rated corporate bonds. By accepting BBB-rated debt, the range is extended three notches to all 10 investment grades. The central bank took 850 billion yen in corporate bonds as of Nov. 28.

The government is also putting heat on lenders to ease companies’ financing difficulties. Finance Minister Shoichi Nakagawa will meet with heads of commercial banks today to discuss funding for small firms, the Financial Services Agency said. Nakagawa doubles as minister of the banking regulator. Shirakawa is reluctant to cut the key rate again, reiterating today that further reductions would reduce the flow of funds in the money market by making returns so scant that investors have little incentive to trade. Future decisions depend on how the economy, prices and financial conditions develop, he said. "The Bank of Japan remains cautious about an additional rate cut for the moment," said Mari Iwashita, chief market economist at Daiwa Securities SMBC Co. in Tokyo. "But the bank will probably be forced to alter its policy stance as the downside risks for the economy intensify."

Federal Reserve Chairman Ben S. Bernanke signaled he’s ready to dig deeper into the central bank’s toolkit after cutting interest rates almost as much as he can, opening the door to a shift by policy makers this month. Bernanke yesterday said he may use less conventional policies, such as buying Treasury securities, to revive the economy, because his room to lower the main U.S. rate from the current 1 percent level is “obviously limited.” Even so, reducing the rate is “certainly feasible,” he said.

Policy makers may decide at their next meeting Dec. 15-16 on the details of carrying out such a shift, which might resemble the “quantitative easing” strategy the Bank of Japan pursued in 2001-2006 after driving interest rates close to zero. The Fed chief’s readiness to rely more on adding reserves to the banking system prompted JPMorgan Chase & Co. economist Michael Feroli to refer to him as “Bernanke-san” in a note yesterday.

“This sets the stage for the Federal Reserve to be more formal in its adoption of quantitative easing,” said Vincent Reinhart, the Fed’s director of monetary affairs until last year and now a scholar at the American Enterprise Institute in Washington. The Bank of Japan is the only major central bank in modern times to rely on quantitative easing -- the strategy of injecting more reserves into the banking system than needed to keep the target interest rate at zero.

Steps Bernanke has taken so far have prompted some Fed officials and economists to say the central bank is already pursuing such a policy. With an array of emergency-loan programs aimed at easing the worst credit crisis in seven decades, Bernanke has expanded the Fed’s balance sheet to $2.11 trillion as of last week, more than double the year-earlier level.

Feroli, a former Fed economist, headlined his research note yesterday: “Bernanke-san goes further down the path of Quantitative Easing.” Bank of Japan Governor Masaaki Shirakawa said in May that while the strategy “was very effective in stabilizing financial markets,” it had “limited impact” in remedying Japan’s economic stagnation because banks wouldn’t lend and companies wouldn’t borrow.

Bernanke himself didn’t use the quantitative easing term in his remarks yesterday to the Austin, Texas, Chamber of Commerce. If he does officially adopt the new approach, it will require a change in the way the policy-making Federal Open Market Committee conducts its business, Reinhart said. The FOMC, which currently votes on the level of interest rates, may now find itself debating the size of the Fed’s balance sheet and struggling to find ways to communicate that decision to financial markets, he said.

Investors didn’t immediately take to the prospect of a new strategy yesterday. While Treasuries extended gains after Bernanke’s remarks, stocks slid the most since October, wiping out more than half of last week’s rally. The Standard & Poor’s 500 Index sank 8.9 percent to 816.21, with financial stocks in the index tumbling a record 17 percent as a group.

The Fed chief’s comments coincided with the determination by economic scholars yesterday that the U.S. recession began one year ago this month. That declaration came from a committee of the National Bureau of Economic Research, a private, nonprofit group based in Cambridge, Massachusetts. The U.S. economy “will probably remain weak for a time,” even if the credit crisis eases, Bernanke said yesterday in his speech. While the Fed can’t push interest rates below zero, “the second arrow in the Federal Reserve’s quiver -- the provision of liquidity -- remains effective,” he said.

One option is for the Fed to buy “longer-term Treasury or agency securities on the open market in substantial quantities,” Bernanke said. “This approach might influence the yields on these securities, thus helping to spur aggregate demand.” Should purchases of Treasuries fail to accomplish the Fed’s goals, “there’s very much a likelihood that they could expand the range of assets that they buy,” said former Atlanta Fed research director Robert Eisenbeis, now chief monetary economist at Cumberland Advisors, in an interview with Bloomberg Television.

At the same time, aiming to increase loans when banks still need to rid their balance sheets of bad assets “is a bit myopic,” Eisenbeis said. “They’re not going to expand lending when they’ve got a problem of leverage.” Last week, the Fed announced two new programs aimed at unfreezing credit for homebuyers, consumers and small businesses. Those include a commitment to buy as much as $600 billion of debt issued or backed by government-chartered housing-finance companies and a $200 billion initiative to support consumer and small-business loans.

The Fed’s balance sheet “will eventually have to be brought back to a more sustainable level,” Bernanke said. “However, that is an issue for the future; for now, the goal of policy must be to support financial markets and the economy.”

General Motors Corp., Ford Motor Co. and Toyota Motor Corp. said November U.S. sales tumbled more than 30 percent as the recession and Detroit automakers’ aid pleas kept buyers away from showrooms. GM, the largest U.S. automaker, said sales dropped 41 percent, while No. 2 Ford was down by 31 percent. Toyota, Asia’s biggest automaker, posted a 34 percent decline and Honda Motor Co. slid 32 percent.

Their results showed the strain of the deepening economic slowdown and GM’s announcement last month that it might not have enough cash to last through the year. GM, Ford and Chrysler LLC were presenting their survival plans to Congress today. “Most consumers are very guarded about big-ticket items,” said Dennis Virag, president of Automotive Consulting Group in Ann Arbor, Michigan.

Ford expects the seasonally adjusted annual sales rate for November to be lower than October’s 10.6 million, the company’s marketing chief, Jim Farley, said on a conference call. Analysts and economists surveyed by Bloomberg had projected a November rate of 11 million. An industrywide decline would mark the 13th straight monthly drop, the longest slide in 17 years.

Ford’s total plummeted to 123,222 cars and trucks, from 177,485 a year earlier, as none of its four U.S. brands added sales. The Volvo division, which Ford is considering selling, lost 46 percent, the biggest plunge among the four units. The declines for individual models included 38 percent for the Focus subcompact, 60 percent for the Edge crossover wagon and 19 percent for the F-Series pickup truck. Ford is responding by slashing first-quarter North American output by 38 percent to 430,000 cars and trucks from 692,000 in 2008’s first three months. Dearborn, Michigan-based Ford didn’t change its fourth-quarter production plan of 430,000 vehicles.

Toyota, which may overtake Detroit-based GM as the world’s biggest automaker this year, posted declines for every model in its Toyota, Lexus and Scion lines except for its new Sequoia and Lexus LX sport-utility vehicles, according to company data. Toyota’s sales slid to 130,307 from 197,189. Honda, Japan’s second-largest automaker after Toyota, sold 76,233 vehicles, according to a statement.

Chrysler may say sales plummeted 44 percent, based on the average estimate of five analysts. Tokyo-based Nissan Motor Co. may say sales fell 35 percent. Lower consumer confidence and tight credit availability also dragged down the results for the Asian automakers, which aren’t part of the push by GM, Ford and Auburn Hills, Michigan- based Chrysler for $25 billion in low-interest federal loans.

U.S. automakers probably held 47 percent of their home market, automotive-research firm Edmunds.com in Santa Monica, California, said in a Nov. 24 report. That figure would match their share in October, according to Autodata Corp. of Woodcliff Lake, New Jersey. The industry is struggling against a decline in U.S. personal spending in October of 1 percent, the most since the 2001 contraction. The drop in purchases followed a 0.3 percent retreat in September, the Commerce Department said Nov. 26.

Consumer sentiment improved in November, with the Conference Board’s confidence index rising to 44.9 from a record low 38.8 the prior month, the private New York-based research group said Nov. 25. “Widespread talk of bankruptcy in the press” had the potential to reduce the monthly sales rate, Rod Lache, a New York-based analyst with Deutsche Bank AG, wrote in a note to investors Nov. 24.

GM said Nov. 7 it would run out of cash by the end of the year without government assistance. During congressional hearings last month, Ford Chief Executive Officer Alan Mulally and Chrysler CEO Robert Nardelli argued a GM failure would ripple through the supply chain and cripple all automakers. Democratic leaders have been seeking to tap the $700 billion bank-bailout fund, in addition to $25 billion in low- interest loans already approved by Congress to help retool factories to make more-efficient autos. Republicans want to speed access to the energy-efficiency money and leave the bank funds off limits.

Automakers sought to temper their sales slump with “record high” incentives, said Jesse Toprak, director of industry analysis for Edmunds.com. They also benefited from “remarkably lower gas prices,” Toprak said. Gasoline at U.S. pumps averaged $2.11 a gallon last month, compared with $3.52 through the first 10 months, according to motoring group AAA.

Ford began offering employee pricing for all buyers on Nov. 19 for almost all its 2008 and 2009 Ford, Lincoln and Mercury brands. GM started a “Red Tag” promotion almost 10 days early this year, on Nov. 15, where prices include all cash-back incentives. Chrysler promised $6,000 cash back on its 2008 300C sedan and Toyota City, Japan-based Toyota is offering no-interest loans on more than half its models.

For the Big Three automakers to win over Washington lawmakers in their bid for federal aid, they will have to address a critical question in the business plans they give to Congress on Tuesday. Just how serious are they about shrinking their vast lineups of different brands and models to match the current harsh reality of the market? Between them, General Motors, Ford Motor and Chrysler sell 112 different car and truck models through 15 brands in the United States. By contrast, the top three Japanese automakers — Toyota, Honda and Nissan — have roughly half as many choices with 58 models combined sold through seven brands.

A wide range of offerings was historically a source of strength for the American companies when they dominated the vehicle market — a strategy of providing a car for “every purse and purpose” as Alfred P. Sloan, G.M.’s leader in the 1920s and 1930s, once said. But the Big Three now sell fewer than half of all new vehicles in this country, with a market share of about 47 percent this year, compared to 62 percent just five years ago. Supporting all those models and brands with separate marketing budgets, design teams, dealers and management divisions represents an enormous expense, particularly for G.M. The proliferation of models is one big reason the American companies are losing so much money as vehicle sales slump to their lowest point in 15 years.

As part of their plans to get $25 billion in federal aid, the Detroit companies will be making many promises, including symbolic ones. For example, Ford’s chief executive, Alan R. Mulally, will offer to take a pay cut from his last year’s compensation of $21 million, according to people with knowledge of the company’s plans. Mr. Mulally is also traveling to Washington in a Ford Escape Hybrid (two weeks ago, the American automakers’ chief executives traveled by corporate jet, inviting barbs from lawmakers.) G.M. and Chrysler declined to disclose the travel plans of their leaders this time.

But the Big Three also need substantive changes to drastically cut costs, industry analysts said, including trimming their glut of products and sprawling distribution networks to go with their shrinking market shares. “Downsizing brands and models is the minimum they have to do,” said John Casesa, a principal in the auto consulting firm the Casesa Shapiro Group. “This can’t just be about resizing the companies, but also restructuring them.” Ford took a step on Monday toward reducing its brand lineup by announcing it was considering the sale of Volvo, its Swedish luxury brand. Volvo sales have fallen 28 percent so far this year. “Given the unprecedented external challenges facing Ford and the entire industry, it is prudent for Ford to evaluate options for Volvo,” Mr. Mulally said.

G.M. is already trying to sell its Hummer brand. In its report to Congress on Tuesday, the company may settle widespread speculation that it is considering selling or eliminating the Saab, Saturn and Pontiac brands as well. People familiar with G.M.’s deliberations said that the company had considered earlier this fall a plan to put the Saab and Saturn brands up for sale. But those plans were dropped because of the lack of potential buyers. With a market share so far this year of about 22 percent in the United States, G.M. is struggling with the costs of filling showrooms with eight separate brand lineups. “Cutting Saab and Hummer are no-brainers because each of them has 0.2 percent of market share, so they’re irrelevant,” said Jerome P. York, who was a member of G.M.’s board during 2006. “Beyond that, Pontiac looks very suspect to me.”

But shutting down a brand is a complicated and costly effort that requires buying out dealers protected by state franchise laws, as well as scaling back production of vehicles. In 2000, G.M. decided to eliminate its Oldsmobile brand after its sales fell from 1.1 million vehicles a year in 1985 to about 265,000 a year. But the process took nearly four years and cost G.M. more than $1 billion. Rick Wagoner, the automaker’s chairman, has repeatedly cited the problems of closing Oldsmobile as a prime reason to avoid eliminating more brands.

G.M., however, is spending down its cash hoard by $2 billion a month, and the company has acknowledged that it is teetering dangerously close to bankruptcy. In asking for up to $12 billion in federal loans, Mr. Wagoner told lawmakers last month that the company could run out of cash by the end of the year without government assistance. Shrinking dealer networks may be another important component of the business plans that G.M., Ford and Chrysler will present Tuesday in an effort to convince Congress that they have viable, long-term strategies. G.M., for example, has about 6,700 dealers in the United States, compared to 1,200 for Toyota (the disparity is even greater when franchises are counted — G.M. dealers operate 14,000 franchises for its many brands, compared to 1,600 franchises for Toyota).

Separately, union leaders will meet on Wednesday in an emergency session in Detroit to possibly discuss renegotiating terms of the latest contract, Bloomberg News reported. The automakers are also bracing for news on Tuesday of yet another dismal month in the marketplace. Sales of new vehicles are expected to fall 27 percent for November from the same period last year, according to the auto research Web site Edmunds.com.

The forecasts by Edmunds.com suggest that Chrysler’s sales were down 41 percent in November, Ford’s 33 percent, and G.M.’s 28 percent. Analysts said that dealers were still being hurt by a lack of available credit for consumers shopping for new vehicles. “Until credit actually loosens up, we’re going to see a suppressed situation that is not sustainable in the long term,” said Tom Libby, senior director of industry analysis for J. D. Power & Associates.

Top UAW officials from across the country will meet in Detroit on Wednesday to consider key concessions in hopes of helping Detroit's automakers gain congressional approval of $25 billion in federal loans. Automakers must submit plans to Congress today to show how they will use the loans. Ford Motor Co. planned to give Congress a clear picture of future, more-efficient models and General Motors Corp. readied a blueprint for cuts across the board. UAW officials from Ford, GM and Chrysler LLC will meet Wednesday and later break off into meetings of representatives of the individual automakers.

One UAW local official who plans to attend expects the issues considered to include eliminating the jobs bank and further concessions in the way automakers fund the retiree health care trust. The jobs bank, which pays workers for up to two years after a plant closes, has drawn criticism from lawmakers, even as the UAW contends it has been scaled back. A UAW spokesman was not available for comment Monday. Along with the plans, automakers were crafting their last-ditch sales pitch for $25 billion in loans after a miserable reception from lawmakers last month.

Following the uproar over executives using corporate jets to ask for taxpayer money, Ford Chief Executive Officer Alan Mulally will make the 500-mile trip to hearings in Washington later this week in a Ford hybrid and may offer to take a pay cut. Spokespeople for GM and Chrysler declined to say how their executives will arrive in Washington, except to rule out a corporate jet. Meanwhile, the UAW told Congress that it's prepared to make major alterations in its deals with the automakers to help get loans approved, but only as part of broad restructurings that will require oversight by the Obama administration. The UAW "will make it clear we could be facing the collapse of GM by the end of the year, and Chrysler soon after," said UAW Legislative Director Alan Reuther. "We continue to believe bankruptcy is not a viable option."

A Senate committee will review the automakers' plans Thursday, and a House committee will do so Friday, with the same lineup of the three chief executives and UAW President Ron Gettelfinger expected to testify. A spokesman for the office of House Speaker Nancy Pelosi, D-Calif., said it would be up to the committees to judge the automakers' plans, and that their decision would drive whether Congress returns next Monday. The automakers' plans will arrive the same day the industry expects to report another month of depressed sales, nearing the 25-year lows touched in October, because of worries over job cuts and the recession.

Such a rate could spur even deeper discounts in December or additional cuts in production, weakening the automakers' finances even further. Russ Shelton, owner of Shelton Pontiac Buick GMC Inc. in Rochester Hills, said he's anxious for the automakers to present their plans to Congress because he doesn't think anything will improve until Congress makes a decision. He called November sales "horrible." "It's just not good," he said. "It was worse than October. The phones aren't ringing, people aren't walking into the showroom. I don't think we're going to see any change until this all shakes out." Since the automakers appeared before Congress to request aid and the news emerged that GM is considering eliminating Pontiac -- along with Saturn, Saab and Hummer -- Shelton said sales have dropped off even more.

"It's hurting our business," Shelton said. "For so many years, Pontiac has been our No. 1 selling brand." GM's plan for how it will use $12 billion of the $25-billion pool could run close to 100 pages for lawmakers, with a shorter summary for public viewing. That plan will likely include several steps, such as lower executive pay, renegotiated debt, shedding up to four brands and new concessions from the UAW, according to people familiar with the plan. While GM could make many such cuts on its own, renegotiating contracts with the UAW, bondholders and dealers could take months. GM has already pledged to make $20 billion in cost cuts through next year, although $5 billion of those rely on selling assets such as the Hummer brand or borrowing money, neither of which GM can count on in the near future.

Ford is expected to craft a plan that looks less like a loan application and more like a request for a credit card, with new details on future models. It has more cash on hand than GM or Chrysler, and has made more progress toward revamping its vehicles to more fuel-efficient models. Ford said Monday that it was considering selling its Volvo brand. The company expects that much of its U.S. lineup will qualify for retooling loans under the $25-billion program Congress approved in September, lessening its need for immediate aid even further. By driving to Washington in one of those models, Mulally hopes to emphasize the company's plans in a tangible way.

One stumbling block could be whether Mulally, who was paid $22 million in salary and stock options last year, and Ford agree to cuts in executive pay, one of the considerations Pelosi and Senate Majority Leader Harry Reid, D-Nev., asked the automakers to make last month. GM and Chrysler are expected to agree to them, and several lawmakers have said executives must share in the sacrifices necessary to receive the loans. Lawmakers may put off a thorny debate over how to pay for aid by offering a temporary fix, giving Detroit automakers just enough cash to get through February and prove they can negotiate the cuts they've promised. Democrats want the $25 billion to come from the $700-billion financial industry bailout; Republicans and Michigan lawmakers would use $25 billion from the retooling loans.

The temporary solution also would allow the Obama administration to take a larger hand in crafting the aid plan, reshuffling the priorities automakers will present this week. Reuther said part of the reason for Congress to request so much data from the automakers is to arrive at a lower figure for aid. "It's not feasible for Congress to hammer out a total restructuring plan in the next week," he said. "What's needed is emergency assistance so the companies don't collapse, and that's a bridge to a further process. ... No one should be fooled into thinking someone's going to wave a magic wand and create a complete blueprint in the next three days."

Ford Motor Co. asked Congress for a credit line of as much as $9 billion, saying it expects to break even or be profitable before taxes in 2011. The automaker said it hopes to avoid tapping the financing and doesn’t anticipate a “liquidity crisis” in 2009, barring a competitor’s bankruptcy or more severe economic slump. Ford plans to sell five corporate jets and would pay Chief Executive Officer Alan Mulally a $1 annual salary if the loan is used. General Motors Corp. and Chrysler LLC were to submit plans later today.

“We hope that we can work something out” with the automakers, Senate Majority Leader Harry Reid, a Nevada Democrat, told reporters. “We don’t want to throw them a lifeline if the lifeline doesn’t get them to the shore.” Lawmakers set hearings for Dec. 4 and 5 and may vote on an aid proposal next week. Ford, GM and Chrysler must convince a divided Congress that their plans to shrink are severe enough to ensure repayment of $25 billion in proposed loans. Lawmakers are split on whether any aid should come from a $700 billion bank-rescue fund or Energy Department loans approved in September.

“Our expectation is that they go and duly genuflect and appear to be repentant,” said Eric Noble, president of Car Lab, an Orange, California-based consulting firm for automakers including GM, Chrysler and Toyota Motor Corp. GM, which along with Ford and Chrysler was criticized for using corporate jets to get to Washington last month, said in a statement that it will halt travel on such aircraft starting Jan. 1 and is pursuing the sale of four planes.

Rick Wagoner, GM’s chief, will drive to this week’s hearings in company vehicles including a gasoline-electric Malibu sedan, said Tony Cervone, a spokesman for the Detroit-based company. Wagoner also would work for $1 a year, Cervone said. “We all learned a lot at the last hearing,” Mulally said today in an interview. This week, “we’re going to focus on what our plans are to create a viable Ford,” he said. Ford said yesterday that Mulally will drive to Washington.

Dearborn, Michigan-based Ford’s proposal includes investing about $14 billion in the next seven years to improve vehicle fuel efficiency. The second-largest U.S. automaker in its statement also calls for focusing on its namesake brand through efforts such as exploring the sale of its Volvo unit. Ford also said it’s in talks with the United Auto Workers union on further labor-cost reductions.

The UAW called an emergency meeting for tomorrow to consider concessions that make it less costly to cut jobs, people familiar with that session said. The companies report November sales today that probably extended a 15 percent slide through October. The auto companies must show that their plans will enable them to repay the proposed U.S. loans, White House spokeswoman Dana Perino said today.

“We are sticking to our guns in that these companies need to prove they are viable,” Perino told reporters traveling to Greensboro, North Carolina, with President George W. Bush. Should Ford use the loan, its plan backs “taxpayer protections” through stock warrants. The price at which they could be exercised and the number of shares would be determined by the price of Ford shares when the financing is tapped.

“Government loans would serve as a critical backstop or safeguard against worsening conditions,” Mulally said in the company’s statement. Ford said that as of Sept. 30 it had $19 billion in cash and $11 billion in available credit lines. The company is taking steps such as reducing capital spending to improve its cash position by $14 billion to $17 billion through 2010.

The automaker also said the number of U.S. Ford dealers by the end of this year will be down 14 percent from 2005 “to increase efficiency and promote mutual profitability.” The company reiterated that it’s canceling all management bonuses worldwide in 2009, and for all employees in North America. GM, the biggest U.S. automaker, has said it may be short of cash to pay monthly bills by year’s end. Wagoner will cut debt and shuffle U.S. brands, people familiar with the matter said.

BlackRock Inc.’s Peter Fisher said the U.S. Treasury should consider selling 100-year bonds to ease the federal government’s borrowing costs as it faces a budget deficit expected to top $1 trillion. “If you issued a 100-year bond and had principal and interest pay down smoothly over the last 50 years, you create a great borrowing device for the Treasury that would let us move this hump of borrowing over the generational retirement that’s coming up,” Fisher, managing director and co-head of fixed income at BlackRock in New York, said in a Bloomberg Radio interview.

The Treasury last month tripled its estimate of planned debt sales in the final three months of the year to a record $550 billion as it attempts to fund bailouts for banks and fiscal stimulus programs to jump start economic growth. Treasury Secretary Henry Paulson told a conference in Washington Nov. 17 that the U.S. will issue some $1.5 trillion worth of Treasury securities in the fiscal year that began Oct. 1.

Fisher, Treasury undersecretary from August 2001 to October 2003, eliminated 30-year bond auctions in 2001 to reduce government borrowing costs after four years of federal budget surpluses. The U.S. hasn’t been in the black since. The government revived sales of the security in February 2006. Treasury yields have plummeted as investors have flocked to the safety of U.S. government debt during the worst financial crisis since the Great Depression. Bonds rallied for a fourth day yesterday, sending yields on two-, 10- and 30-year debt to the lowest since the Treasury began regular sales of the securities.

Federal Reserve Chairman Ben S. Bernanke said yesterday that he may use less conventional policies, such as buying Treasury securities, to revive the economy. The 30-year Treasury bond, the U.S. government’s longest maturity debt, has higher borrowing costs because of the uncertainty caused by a lump-sum payment of the bond’s principal at the maturity date, Fisher said. He said the Treasury would have to eliminate that volatility on a 100-year bond by paying down the principal over time.

In 1993, Walt Disney Co. became the first company since at least 1954 to issue 100-year bonds. In 1997, Ford Motor Co. sold $500 million of 100-year bonds, exploiting a decline in Treasury yields. Demand for the Ford bonds, priced to yield 7.81 percent, was so high that it sold out within 25 minutes of the start of the sale. “There are a lot of investors, pension funds, endowments, who would love to get a long-term annuity like that,” Fisher said. “They love to get an interest-only stripped off the 30- year, and they’d love to get something even longer. I think there would be a lot of demand from investors for that.”

The United States economy officially sank into a recession last December, which means that the downturn is already longer than the average for all recessions since World War II, according to the committee of economists responsible for dating the nation's business cycles. In declaring that the economy has been in a downturn for almost 12 months, the National Bureau of Economic Research confirmed what many Americans had already been feeling in their bones. But private forecasters warned that this downturn was likely to set a new postwar record for length and likely to be more painful than any recession since 1980 and 1981. "We will rewrite the record book on length for this recession," said Allen Sinai, president of Decision Economics in Lexington, Mass. "It's still arguable whether it will set a new record on depth. I hope not, but we don't know."

As if adding a grim punctuation mark to what could become the worst holiday shopping season in decades, the Dow Jones industrial average plunged nearly 680 points, or 7.7 percent, to 8,149.09. Part of the drop may have reflected profit-taking after last week's surge in stock prices, but it also came in response to new data showing that manufacturing activity dropped to its lowest point in 26 years. Both the chairman of the Federal Reserve, Ben S. Bernanke, and the Treasury secretary, Henry M. Paulson Jr., vowed to use all the tools at their disposal to restore a measure of normalcy to the economy.

Mr. Bernanke, speaking to business leaders in Austin, Tex., said it was "certainly feasible" to reduce the Fed's benchmark overnight lending rate below its current target of 1 percent, signaling that the central bank would lower the rate at its next policy meeting in two weeks. And in an unusually explicit follow-up, Mr. Bernanke said the central bank was also prepared to use the "second arrow in our quiver" if policy makers have already reduced that rate, called the federal funds rate, to nearly zero. Among the options, he said, the Fed can start aggressively buying up longer-term Treasury securities. That would have the effect of driving down longer-term interest rates. The Fed is already doing something of that sort, by buying up commercial debt from private companies as well as mortgage-backed securities guaranteed by Fannie Mae and Freddie Mac.

Investors reacted to Mr. Bernanke's remarks by pouring money into longer-term Treasury bonds, which briefly pushed already-low yields on 10-year and 30-year Treasuries to new record lows. Investors appeared to be reacting mainly to the clear signal from Mr. Bernanke that the Fed was preparing to pump money into the economy by buying up longer-term bonds. The yield on 30-year Treasuries declined 0.23 percentage points, to 3.21 percent, and briefly touched a record low of 3.18 percent. The yield on 10-year Treasuries fell 0.19 percentage points, to 2.73 percent.

In normal times, those kinds of yields would automatically mean lower interest rates on mortgages, automobile loans and other forms of consumer debt. But the credit markets have been stalled by continued fears among financial institutions about who can be trusted for even short-term transactions, so the effects on home loans and other purposes could remain modest. Mr. Paulson, in a speech in Washington on Monday, vowed to look at new ways to use the $700 billion bailout fund that Congress approved in October.

In Congress, Democratic leaders are drawing up a huge new fiscal stimulus plan that could total more than $500 billion. Democrats said they planned to have the measure ready as soon as Congress convened with a strengthened Democratic majority in January. Meanwhile, Democrats could take up legislation next week that would provide financial assistance to the automobile industry. President Bush, increasingly the odd man out in the last weeks of his term, said his administration would do whatever was necessary to safeguard the system.

"I'm sorry it's happening, of course," Mr. Bush said in an interview with ABC's "World News" on Monday. "Obviously, I don't like the idea of Americans losing their jobs or being worried about their 401(k)s. On the other hand, the American people got to know that we will safeguard the system." But many analysts said they saw no signs yet that the economy was nearing a bottom. American consumers, who for decades have been the country's tireless source of growth when all else failed, have cut back on their spending more sharply than at any time since the early 1980s.

Consumer spending plunged in the third quarter of this year, and the evidence so far suggests they may pull back even more in the fourth quarter. Consumers account for about 71 percent of American economic activity, and their most recent retreat is occurring even though gasoline prices have dropped by almost half in the last month and left people with more money in their pockets. In officially declaring that the current recession began in December 2007, the National Bureau of Economic Research paid little heed to the fact that the nation's gross domestic product actually expanded slightly in the first and second quarters of 2008.

In explaining its decision, the bureau noted that a wide variety of other indicators, including payroll employment and personal income, peaked in December 2007. Payroll employment has dropped every month since then. Personal income declined and then zigzagged until June, and has declined steadily since then. The gross domestic product often fluctuates widely from quarter to quarter, but it also received a somewhat artificial boost from the tax rebate checks that the government mailed out last spring and early summer as a temporary stimulus.

Ed McKelvey, an economist at Goldman Sachs, said the bureau's starting point of last December for the recession was close to Goldman's own estimates. The announcement means that the downturn is already one year old. That is longer than the average length of 10.5 months for recessions since World War II. The current record for the longest recession over the last half-century is 16 months, which was reached in both the downturns of 1973-74 and 1980-81. Mr. Sinai of Decision Economics said it was hard to imagine that this downturn would have hit bottom within the next four months, which would make it all but certain to set a new record. Mr. Paulson, who teamed up with the Fed last week to begin a new $200 billion program to buy up consumer debt and small-business loans, said he had committed all but about $20 billion of the first $350 billion Congress authorized for the bailout fund. "We are actively engaged in developing additional programs to strengthen our financial system so that lending flows to our economy," Mr. Paulson said in his speech. "We are continuing to examine potential foreclosure mitigation ideas that may be an appropriate" use of the funds.

Democratic lawmakers have sharply criticized Mr. Paulson for refusing to use any of the money yet for reducing foreclosures. Sheila C. Bair, chairwoman of the Federal Deposit Insurance Corporation, warned last month that as many as 4.5 million people were likely to lose their homes through foreclosure. Ms. Bair proposed a plan that she said could prevent about one-third of those foreclosures.

Gov. Arnold Schwarzenegger ordered the new Legislature in to work on its first day, declaring a fiscal emergency Monday in response to the state's deteriorating finances and urging lawmakers to "get off of their rigid ideologies." But even as Schwarzenegger warned that California could run out of cash within two months, there was little indication that the Capitol's partisan gridlock has waned enough to allow for an easy resolution to the state's $28-billion budget gap.

Republican lawmakers, who last week blocked a Democratic proposal to cut billions of dollars from schools, healthcare and welfare programs while tripling the vehicle license fee, quickly reiterated their opposition to any new taxes, which both Schwarzenegger and Democrats say are indispensable. Democratic legislators again dismissed some of Schwarzenegger's proposals to ease labor rules on business in order to boost the economy.

"Now, I compare the situation that we are in right now to finding an accident victim on the side of the road that is bleeding to death," Schwarzenegger said at a news conference at his Los Angeles office. "We wouldn't spend hours debating over which ambulance we should use, or which hospital we would use, or which treatment the patient needs. No, we would first stop the bleeding, and that's exactly the same thing we have to do here."

Schwarzenegger said immediate action is essential because although the state projects a $28-billion deficit by mid-2010, California is on track to run out of cash by February or March. He said that if lawmakers fail to act within 45 days as required under his declaration of a fiscal emergency, they will have to find an additional $1.5 billion to $2 billion in savings or new revenue above what is needed right now. He said the administration is already drawing up plans to lay off state workers.

"It's like an avalanche, that it gains momentum," he said. The November elections changed little in the partisan standoff. Democrats picked up three seats in the 80-member Assembly, bringing their majority to 51, still three short of the two-thirds needed to pass fiscal measures. No seats changed hands in the 40-member Senate, where there are only 24 sitting Democrats because Mark Ridley-Thomas was elected to the Los Angeles County Board of Supervisors, leaving a vacancy. That means Senate Democrats will now have to win over three Republicans -- one more than before -- to pass a budget. Of the 120 legislators, 28 are new and several have served in the Legislature before.

Assembly Republican leader Michael Villines (R-Clovis) rebutted Schwarzenegger's criticism that lawmakers are too rigid, saying in a statement that his party's anti-tax stance "is not blind ideology . . . but our sincere belief that higher taxes will hurt the economy and lead to more uncontrolled spending." Darrell Steinberg, the new Senate president pro tem, challenged the governor's insistence that tax hikes be coupled with stimulus measures. "Economic stimulus won't matter if we don't make the necessary cuts and raise sufficient revenue to give bond-holders the confidence that California's credit is good," said Steinberg (D-Sacramento).

Both Steinberg and Assembly Speaker Karen Bass (D-Los Angeles) dismissed Schwarzenegger's proposals to help businesses by giving employers more leeway in setting workers' hours and lunch breaks. "I am open to some of what he is proposing, but what I have major problems about is dismantling labor laws, dismantling environmental laws," Bass said. She also indicated that the onus was on Schwarzenegger to negotiate a solution that Republicans could sign on to, saying that "one way that it would be very helpful for him to participate would be in getting to know the members of his party and persuading members of his party to vote on the budget."

Schwarzenegger implied that legislators were resisting his compromises out of fear. He told reporters that in his attempts to end the impasse, "I even proposed to them that they should pass a law to give me all the power for one hour, I'd make all the decisions so that they don't have to be blamed for anything." Lawmakers turned him down, he said. Schwarzenegger had to declare the fiscal emergency in Los Angeles instead of in Sacramento as planned because the fog in the capital was too dense to allow planes to land. He quickly departed for Philadelphia, where most of the governors will meet today with President-elect Obama. In a tacit rebuke to Democrats such as Bass who have emphasized seeking federal aid to help the state out of its financial plight, Schwarzenegger told reporters:"The federal government shouldn't give us a penny until we straighten out our mess and we can live within our means."

The nation's governors urged Congress to pass an economic-stimulus package for states, warning that their collective budget shortfall could rise to $140 billion by mid-2010. Pennsylvania Gov. Ed Rendell, who heads the National Governors Association, and Vermont Gov. James Douglas met with congressional leaders Monday to give them a preview of the association's proposal, which seeks at least $126 billion of federal funding to help states pay for rebuilding infrastructure, expanding social programs and extending unemployment benefits.

On Tuesday, a group of about 40 governors is scheduled to meet with President-elect Barack Obama in Philadelphia to discuss the proposal. Mr. Obama has repeatedly pledged to help states cope with the economic downturn. The governors said the plan, if implemented, would do far more to spur the economy than other federal stimulus efforts, such as the $700 billion financial-industry rescue package approved by Congress in October. "Not any of that help has produced one new job," Gov. Rendell said.

House Speaker Nancy Pelosi, who was among the lawmakers meeting with the two governors Monday, has voiced support for a state stimulus package that includes money to jump-start infrastructure projects, though the California Democrat hasn't settled on a specific amount. Mr. Obama has asked Congress to prepare a stimulus package by the day he takes office. After enjoying years of flush budgets, many states have been forced to prune spending because of falling sales-tax receipts and other revenue. The state of New York, which depends on Wall Street for about 20% of its revenue, said it is facing a $2 billion budget shortfall by March. In California, Gov. Arnold Schwarzenegger declared a fiscal emergency Monday and called lawmakers into a special session to address a $11.2 billion shortfall. The state's revenue gap is expected to hit $28 billion over the next 19 months, and without quick action, the state said it is likely to run out of cash in February.

Though some energy-producing states enjoyed a boom when oil prices surged this year, Gov. Rendell said 43 states face a looming deficit within the year. States collectively have trimmed $53 billion so far from their fiscal 2008 and 2009 budgets, the National Conference of State Legislatures said.

Unlike the federal government, states are generally prohibited by their constitutions from running deficits. The governors association package, which seeks about $60 billion to finance infrastructure projects, is designed to square with one of Mr. Obama's core campaign proposals. During the presidential contest, Mr. Obama called for about $25 billion of unspecified federal aid to states on top of $25 billion of infrastructure-repair assistance. In a late-November radio address in which he promised to create 2.5 million new jobs over the next two years, he said, "We'll put people back to work rebuilding our crumbling roads and bridges" and "modernizing schools that are failing our children."

An October study by the American Association of State Highway and Transportation Officials estimated that 3,100 projects nationwide could break ground within three months of receiving federal funding. Texas has the highest number of projects in that category, valued at an estimated $1.8 billion in total, the study said. Gov. Rendell said states have more than $136 billion of infrastructure projects that could be started immediately with federal funding. More than 70% of those involve transportation infrastructure, but he said states also need money for public-safety improvements, port expansions and renewable-energy projects. He compared the scale of the proposed stimulus to President Dwight Eisenhower's interstate-highway project of the 1950s. Governors and state legislatures also are seeking a minimum of $40 billion to cover additional costs for Medicaid, the country's health program for lower-income families, over two years; a further extension of unemployment benefits that would cost an estimated $2 billion; and $3.5 billion of college grant money to cover an expected national shortfall.

The federal-relief request from states isn't unprecedented. In 2003, Congress gave states about $20 billion of Medicaid assistance to cover shortfalls stemming from an economic downturn that began in late-2001. Gov. Rendell said he doesn't expect Congress and Mr. Obama to approve all that the governors are requesting. He said he also doesn't expect President George W. Bush to provide much assistance to states before he leaves office in January, though congressional leaders continue to push for that.

Australia’s central bank cut its benchmark interest rate by one percentage point, extending the biggest round of reductions since the nation was last in a recession in 1991. Governor Glenn Stevens lowered the overnight cash rate target to a six-year low of 4.25 percent in Melbourne today, the fourth reduction in as many months. Four of 21 economists surveyed by Bloomberg News forecast today’s move and 15 tipped a three-quarter point cut.

Stevens said monetary policy is now “expansionary” to help restore consumer and business confidence, which has been battered by this year’s 44 percent slump in the benchmark stock index and the biggest drop in house prices since 1978. Three percentage points of cuts since September save borrowers with an average A$250,000 ($159,000) home loan more than A$500 a month.

Today’s decision “is a vital element in the effort to ward off recession in Australia,” said Heather Ridout, chief executive of the Australian Industry Group, which represents the nation’s biggest companies. The Australian dollar traded at 63.78 U.S. cents at 4:48 p.m. in Sydney from 63.74 cents just before the Reserve Bank of Australia’s announcement. The two-year government bond yield rose 12 basis points, or 0.12 percentage point, to 3.05 percent. The S&P/ASX 200 stock index slumped 4.2 percent to 3,528.20 today. Banks led the declines.

“Weighing up the international and domestic developments of recent months, the board judged that a further significant reduction in the cash rate was warranted now, to take monetary policy to an expansionary setting,” Stevens said in a statement. While Australia’s economy has been more resilient than “other advanced economies,” recent evidence indicates that “a significant moderation in demand and activity has been occurring,” he added.

Gross domestic product growth probably slowed in the three months through September to 0.2 percent from the second quarter, when it expanded 0.3 percent, economists forecast. That would cut annual growth to 1.9 percent, the smallest gain since the second quarter of 2002. The GDP report will be released tomorrow. Stevens and his board also cut the benchmark rate by a quarter point in September, followed by a one percentage point reduction in October and a three-quarter point adjustment last month. Today’s meeting is the last scheduled gathering of policy makers until Feb. 3.

Central banks around the world are slashing interest rates in response to a global slump in demand. The Reserve Bank of New Zealand will probably cut its benchmark by a record 1.5 percentage points to 5 percent on Dec. 4, according to 10 of 17 economists surveyed by Bloomberg. The Bank of England and the European Central Bank will also lower borrowing costs this week, according to separate surveys. The Bank of Japan said today it would adopt temporary measures to help companies obtain cash as a deepening recession makes banks reluctant to lend.

“I hope we don’t slip into negative growth, but you have to accept that it’s possible,” National Australia Bank Ltd. Chairman Michael Chaney said yesterday. “It’s in the interests of everybody for demand to be sustained at a reasonable level.” Unlike the U.S., Japan, Europe and the U.K., Australia’s economy has so far avoided a recession, boosted by a mining boom that has kept unemployment close to the lowest level in more than three decades. The jobless rate was 4.3 percent in October.

To buttress the economy, Prime Minister Kevin Rudd said last week that he may allow the government’s budget to slip into deficit for the first time since 2002. The government agreed with state leaders on Nov. 29 to spend A$15.1 billion, mainly on health and education, to generate 133,000 jobs. Rudd is also giving A$10.4 billion in cash grants to the elderly, first-home buyers and families.

Rudd’s spending package, this year’s 27 percent drop in the Australian dollar and “significant policy stimulus will be supporting demand over the year ahead,” Stevens said today. Australia’s three largest banks reduced their variable home-loan rates after today’s central bank announcement. Commonwealth Bank of Australia, the nation’s biggest provider of mortgages, cut the interest rate for its standard variable mortgages by 1 percentage point to 6.7 percent. National Australia trimmed by the same amount and Westpac Banking Corp. adjusted its rate by 80 basis points.

Next year will “see a significant shift in sentiment towards property investments, with many Australians taking advantage of the lower interest rates,” said Warren McCarthy, managing director of real estate company LJ Hooker. Recent reports show the economy is slowing as consumers and businesses trim spending. Company investment growth cooled in the third quarter, business confidence plunged in October to a record low and consumers were pessimistic in November for a 10th straight month. House prices fell 1.8 percent in the third quarter, the most in 30 years.

“We welcome this substantial rate relief,” Australian Treasurer Wayne Swan told parliament today in Canberra. “This is a vital rate cut, delivered at a time when all our joint efforts are directed toward strengthening the economy.” The Reserve Bank expects the inflation rate will fall back within its target range of between 2 percent and 3 percent in 2010.

The Swiss National Bank is becoming the first central bank in Europe to learn what it’s like to live in a zero interest-rate world. “They simply don’t have much room left on interest rates” following a 100 basis-point cut Nov. 20, said Reto Huenerwadel, senior economist at UBS AG in Zurich. “Still, they’re actively using monetary policy and are looking for creative solutions” that may include buying bonds, intervening in currency markets and expanding swaps with other central banks, he said.

With Switzerland following the rest of Europe into a recession, the central bank has slashed the short-term rate it uses to steer borrowing costs in the broader economy to 0.1 percent. As rates approach zero, SNB President Jean-Pierre Roth, like his counterparts at the U.S. Federal Reserve, may instead have to find new tools to restore the flow of credit through the economy and head off the risk of deflation.

Swiss policy makers have already injected billions of francs into the financial system, including a $59 billion package for UBS, and may next have to consider turning to “quantitative easing,” says Fabian Heller, an economist at Credit Suisse in Zurich. The unorthodox tool was last deployed by the Bank of Japan earlier this decade when policy makers kept their key rate at zero and flooded the banking system with cash to encourage lending.

“The SNB has signaled it’s ready to support the financial markets and help the economy recover,” Heller said. “They’ll certainly provide as much liquidity as needed.” The SNB will announce its next rate decision on Dec. 11, after which Roth will hold a press conference.

The SNB’s challenge may soon be shared by other central banks in Europe. Bank of England Governor Mervyn King openly discussed the possibility of zero interest rates for the first time on Nov. 25. The European Central Bank will cut its benchmark rate to 1.5 percent next year, according to the median of 25 forecasts in a Bloomberg News survey, with Citigroup Inc. saying a move to zero is possible.

The Fed has already started to use more unorthodox methods. The U.S. central bank said on Nov. 25 it will purchase as much as $600 billion in debt issued or backed by government-chartered housing-finance companies. James Bullard, president of the Federal Reserve Bank of St. Louis, said on Nov. 21 that “more attention may have to be paid to quantitative measures.”

Fed Chairman Ben S. Bernanke said yesterday he may use less conventional policies such as buying Treasury securities to bolster growth as the scope to lower the main U.S. rate from the current 1 percent is “obviously limited.” So far, the SNB has reached swap agreements with the ECB to get francs to banks outside Switzerland and helped bail out UBS, the nation’s biggest bank, to tackle the crisis. Swiss policy makers have also had some success in pushing down their targeted rate, the three-month rate for borrowing in London.

The SNB has pulled the market rate down by 70 basis points to 1.24 percent since lowering the target to 1 percent on Nov. 20. The three-month rate fell 61 basis points the day after the announcement. SNB President Roth argues that the central bank has room to lower its benchmark rate below 1 percent, saying the bank took the benchmark to 0.25 percent in 2003.

Still, the SNB’s success has come at a cost, with the one- week rate that it uses to steer its main rate now blunted. Complicating their task, money markets remain strained, indicating financial institutions are still hoarding cash after racking up almost $1 trillion in global losses. With credit markets still partially frozen, Swiss policy makers may be better advised to boost the economy by steering the franc’s exchange rate, said Alessandro Bee, an economist at Bank Sarasin. Exports amount to more than half of gross domestic economy and the currency has risen more than 8 percent against the euro this year.

“It makes more sense for the SNB to intervene in foreign- exchange markets than trying to influence long-term interest rates” by buying and selling bonds, said Zurich-based Bee. “Switzerland is a small, open economy. That makes less sense in the U.S. and Japan, which are much more closed.” Swiss leading indicators dropped to the lowest in more than five years in November as the manufacturing industry contracted for a third month. Roth said Nov. 24 that the Swiss economy is probably already contracting and may shrink next year.

The International Monetary Fund predicts advanced economies will contract simultaneously in 2009 for the first time since World War II. In the euro region, Switzerland’s largest export market, manufacturing and service industries contracted at the fastest pace in at least a decade last month. While the SNB will announce its rate decision next week, investors may nevertheless be more interested in Roth’s proposals for reworking monetary policy to deal with the financial crisis. The SNB has “used up its ammunition,” Bee said. “The room to maneuver with traditional monetary policy has just gotten smaller.”

The euro is on a roll. Icelanders are clamouring to join, as soon as they can get into the EU. The Danes seem ready to abandon their long rebellion and sign meekly on the line. A Danish referendum is pencilled in for March. Eastern Europe's states are trying to engineer entry as fast they can to escape the hell of semi-fixed currencies. It was not such a good idea after all to take out euro mortgages in Budapest, Warsaw and Sofia – or Swiss franc mortgages, heaven forbid.

Everybody wants a safe port in this Force 10 storm. No matter if it is full of undetonated mines. No matter, too, that Denmark's travails stem from membership of the ERM, a half-way house that has forced them to raise rates twice – into the Copenhagen property crash. José Manuel Barroso, the Commission's chief, was a little too honest telling French TV that the people who count in Britain hanker for monetary union. What a slip of language. Is this a reversion to his Maoist youth in Portugal, or has he been drinking the EU waters for too long?

The people who count in British democracy are the voters. But let us not quibble. Mr Barroso is right to sense a shift in the undercurrents of British politics. This is a tricky moment for those who fear that total loss of control over our monetary policy would lead to even more destructive cycles of booms and busts than those we have already. "I don't want to break the confidentiality of certain conversations," said Mr Barroso. "But British political leaders have told me that: if we'd had the euro, we'd be better off."

How, exactly, would we have been better off? Our current mess is caused by over-reliance on bankers (7·8 per cent of GDP), six years of incontinent spending by Gordon Brown and a housing/credit bubble that has pushed personal debt to 103 per cent of GDP. Joining the euro would not have prevented any of this. It would have made matters worse. The European Central Bank held rates at 2 per cent for part of this decade to help Germany out of the doldrums. Imagine what such rates – or anything near – would have done to Britain's property boom. You might as well have poured petrol on the fire, as Ireland and Spain can attest.

Events since the crunch began last year – and reached volcanic fury in September – entirely vindicate our refusal to give up control over our economy. Sterling has come down from silly levels, falling 30 per cent against the dollar and 21 per cent against the euro. Perfect. The economy has suffered an asymmetric shock: the currency has acted as the shock absorber. Our sympathies to well-heeled Britons in Aquitaine or Umbria living off sterling rents, but policy is not set for their needs. The Bank of England botched the crisis at first, but it is now responding to emergency with stunning boldness. The 1·5 point cut in November – and what follows this week and beyond as rates fall to the lowest level since the Bank's creation in 1694 – may make the difference between recession and depression. Others that gave up their currency may not be so lucky.

Would you really want Frankfurt to decide your fate? The "people who count" in global finance – investors, economists and hedge funds – are increasingly in despair about the conduct of the ECB. It has misread events at every turn over the past year. It panicked in July when it raised rates to offset an oil and food price spike. By then, Germany and Italy were already in deep recession, and Spain faced a housing crash. The "Shadow ECB", a panel of private economists from across Europe, last week called for immediate and drastic rate cuts, demanding to know what the ECB's strategy now is – if it has any at all.

It would be going too far to describe the ECB's policy utterings as primitive gibberish – as two Nobel Laureates put it – but the bank is bent on a course of action that is at best very different from the reflation strategies of the Anglo-sphere, China and Switzerland, and risks repeating the errors of 1931 to 1933. These are early days in this long, winding crisis. We cannot yet judge whether the euro is a force for stability, or whether it is workable at all – given the lack of an EU treasury and debt union to back it up. Monetary unions can create an illusion of calm for a while. They shield sinners from market discipline, but in doing so they let problems fester.

Locking the currencies together was the easy part of EMU. Once the euro was off the ground, it was unlikely to face an existential test for at least a full credit cycle. But then it gets harder. The Latin bloc has allowed costs to creep up, while Germany has squeezed wages with relentless discipline. The gap has grown wider every year. This is starting to matter. Investors are no longer willing to treat Greek, Italian, Irish or Spanish debt as interchangeable with German debt.

Nothing is pre-ordained in the euro drama. The chief reason for launching the single currency – before economies had properly converged – was to force the pace of political union. It may have to deliver on this agenda. Either the EU creates the machinery to needed cushion the bust on Europe's fringes, or EMU will drift into crisis. The ball is in the court of very reluctant paymasters in Germany. Whichever of these two paths its chooses, there is no earthly reason for us to follow.

The deepest financial crisis since the Great Depression has prompted countries that had held out against the euro to take a new look at the virtues of the common European currency. President Lech Kacyznski of Poland now agrees that his country should shift from the zloty to the euro by 2012. The euro is starting to look good to some reluctant nations now that their own currencies have suffered in the financial crisis.

After turmoil in the currency markets nearly destroyed the currencies of Iceland and Poland, the two countries are rethinking their opposition to the euro. More surprisingly, Denmark — a nearly picture-perfect model of economic management — looks more likely to embrace the euro after rejecting it twice in the past. Denmark was forced to use high interest rates to defend its currency, the krone, against speculative attack. The effects of those higher rates are now rippling through the Danish economy, leading to some to support a change in the currency.

“Denmark is so extremely sound by all macroeconomic standards,” said Thomas Mirow, president of the European Bank for Reconstruction and Development. Its evolving stance on the euro “says a lot about stand-alone options in difficult times.” The huge downturn in financial markets have led to a “flight to quality,” the term investors use to describe a sudden shift of money out of potentially risky assets into the safest possible assets. The euro and investments denominated in euros have benefited from the shift.

Many of the newer member-countries that joined the European Union in 2004 have been unable to meet the two main requirements for adopting the euro — controlling budget deficits and inflation. Only four small countries — Slovenia, Cyprus, Malta and Slovakia — have qualified for the euro. But in just a few furious months, the financial crisis has changed the situation, as the newly visible costs of not using the euro recast the politics in countries that still have independent currencies. In late October, the Polish zloty fell sharply in value against the euro as markets fretted that the economic crisis gripping Hungary would spread to neighboring Poland. Law and Justice, the rightist nationalist party to which the president, Lech Kaczynski, belongs, has long demanded that Poland hold a referendum on the euro, believing it would fail.

But the Polish zloty’s depreciation suddenly threatened a swath of the party’s voters who had taken out euro-denominated loans, analysts said. While these loans came at attractive interest rates, a weaker zloty threatened Polish borrowers with higher mortgage payments. Within a few days, Mr. Kaczynski agreed to a plan for adopting the euro by 2012, and quietly dropped demands for a vote. Shortly thereafter, Poland reached an agreement with the European Central Bank on a currency swap line of 10 billion euros to tide it over during the crisis. The zloty stabilized.

“ ‘When there’s a threat, find God,’ goes the proverb in Poland,” said Rafal Antczak, an economist at Warsaw University. “And that is what has happened.” Hungary, which also received assistance from the European Central Bank, is also shifting toward the euro. And public sentiment has changed in Sweden, which also belongs to the European Union but voted down the euro in 2003. The most telling case of a country looking for a solution to the financial crisis has been in Iceland. The country, an island nation of 300,000, has long rejected membership in the European Union, a prerequisite for adopting the euro, because it feared the bloc’s common fisheries policy would strip it of control over a vital natural resource.

But as Iceland teetered on bankruptcy this year before securing a lifeline from the International Monetary Fund, the country’s krona fell nearly 80 percent against the euro. That made the country’s banks, which had heavy liabilities in other currencies, insolvent almost overnight. Now facing a deep recession, polls show that 60 to 70 percent of Icelanders favor joining the European Union and abandoning the krona. The governing party is reconsidering its opposition. Major companies in Iceland are already moving toward the euro. Alfesca, a seafood company, and Straumur-Burdaras, an investment bank, now plan to list their shares in euros, eliminating the risk to foreign investors of owning a krona-denominated asset.

Analysts point to Denmark as the litmus test for the euro’s appeal. The country had already rejected the common currency in two referendums, the most recent in 2000. Prime Minister Anders Fogh Rasmussen has seized the moment to announce plans for a third referendum, near the end of his center-right government’s term in 2011. The main obstacle to joining the euro zone, however, is still very much political. The Socialist People’s Party, the main opposition group, has long opposed adopting the euro, saying that the European Union needs to pay more attention to popular causes like curbing speculation and making agricultural policies more environmentally friendly.

The party’s continued opposition would probably sink the referendum, because the margin of support is thin. In November, a poll taken by the Danish statistical agency showed that proponents of the euro had a 49 to 45 percent lead over opponents after a long period of lagging behind. Villy Soevndal, chairman of the Socialist People’s Party, has dangled the possibility that it might support the euro if Mr. Rasmussen can get the European Union to take action on the issues it holds dear.

To stabilize trade with the 15-nation euro zone, which is Denmark’s largest trading partner, the Danish central bank keeps the krone fluctuating in a narrow band against the euro. Since the euro was created in 1999, that has meant adjusting interest rates in lockstep with the European Central Bank. As the Danish debate over the euro has gathered steam, supporters of the common currency have come to believe that they can bank on a new set of voters: the young Danes who have traveled widely and experienced the benefits of the euro. At the time of the last referendum, euro cash and coins had not yet been introduced.

Marie Petersen, a student and part-time waitress, said her year studying in Spain convinced her that she would rather have euros in her pocket than Danish kroner. “You can see how it works in other countries,” Ms. Petersen, 21, said. “That’s a big difference from last time.”

European Union finance ministers tussled over a plan to cushion their 27-nation economy from the effects of the global recession and may need to revisit the multibillion-euro package later this month. The debate over how much fiscal stimulus EU members can afford and how it should be paid for is fueling tensions between countries as European leaders struggle to coordinate 200 billion euros ($254 billion) in stimulus measures -- equivalent to 1.5 percent of EU economic growth -- without breaking their own budget rules. EU heads of state will discuss the package next week at a summit in Brussels.

“There was a reasonable degree of consensus in discussions today, not total consensus unfortunately,” EU Economic and Monetary Affairs Commissioner Joaquin Almunia told reporters in Brussels following today’s meeting of finance ministers. Central banks and governments around the world are slashing borrowing costs and boosting spending as the biggest economies slide into the first simultaneous recession since the Second World War. The U.S. economy, the world’s largest, entered a recession a year ago, the panel that dates American business cycles said yesterday, making the contraction already the longest since 1982.

“We agreed that 1.5 percent of gross domestic product was a necessary figure to launch this recovery plan,” French Finance Minister Christine Lagarde, who led today’s meeting, said at the Brussels briefing. “We also agreed that it should include a mixture of national measures as well as European-funded measures.” Budget deficits are ballooning across the EU as governments increase spending in a bid to limit the damage from the worst financial crisis since the Great Depression. Almunia yesterday pledged to enforce EU rules that limit the size of deficits. The rules allow countries to exceed the limit of 3 percent of GDP by “a few” tenths of a percentage point for one year, he said.

Germany today rebuffed an Italian proposal to issue euro- area government bonds, Finance Minister Peer Steinbrueck said. The bonds would make borrowing cheaper for Italy and more expensive for Germany, he said. “My colleagues smirked because they saw through my Italian colleague’s request,” Steinbrueck told reporters after the meeting. His Italian colleague, Giulio Tremonti, called it a “friendly discussion.”

German Chancellor Angela Merkel yesterday said her party will “swim against the tide” of calls to cut taxes in order to support consumer spending in Europe’s largest economy. Germany, the largest contributor to EU funds, is also resisting calls to change the bloc’s budget. “There is a complete lack of coordination,” said Marco Annunziata, chief economist at UniCredit SpA in London. “The Spanish and the French are taking the lead in pushing for strong measures to support growth and you have resistance on the part of Germany.”

Europe’s economy fell into its first recession in 15 years in the third quarter after the U.S. subprime mortgage crisis led to bankruptcies on Wall Street and pushed up lending costs worldwide, eroding the confidence of investors and consumers. The malaise leaves the European Central Bank facing calls to accelerate the pace of interest-rate cuts this week. Having reduced its benchmark rate by half a percentage point on two occasions since early October, investors are betting the ECB may lower it as much as three-quarters of a point when its governing council convenes in two days in Brussels.

“Monetary policy cannot produce an adequate response to the crisis and so we need to provide a strong fiscal response,” said Luxembourg Finance Minister Jean-Claude Juncker, who led yesterday’s meeting of euro-area finance chiefs. “We all think that the discretionary measures which we can and should take should be timely, they should be temporary and coordinated.” Lagarde said the finance ministers may meet again Dec. 18 to discuss governments’ economic-recovery plans. The euro-area economy will shrink by 0.5 percent next year, the IMF forecasts.

Politicians in Brussels may have promised help for Europe's ailing automakers, but the writing is on the wall for job cuts in the industry. With waning demand failing to mop up excess capacity, as demonstrated by a slump in car registration data in Europe, automakers will have little choice but to start swinging the ax.

Some have already begun: Britain's luxury carmaker Aston Martin said it would cut 600 full-time and temporary jobs on Monday, while France's Peugeot Citroen and Renault have already announced thousands of cuts. But a lot of job losses in the European auto industry have targeted temporary staffers, and soon companies will have little choice but to concentrate on full-time employees.

"So far we haven't seen massive [permanent] job cuts at the manufacturers directly," said Tim Schuldt, an analyst at Equinet. "I think there will be more to come." According to Alexsej Wunrau, an analyst with BHF Bank, some automakers were more flexible than others when it came to cutting back capacity. He told Forbes.com that temporary workers made up 10.0% of Bayerische Motoren Werke and Porsche's worker base, whereas they only made up 3.0% of Daimler and Volkswagen. A smaller number of temporary employees made it more likely that potentially-expensive restructuring would have to take place.

Policy-makers are trying to ease the burden on the European auto industry, which is suffering from the consumer downturn and the lack of easy credit for car loans or purchases. The European Commission's stimulus proposal last month offered 5.0 billion euros ($6.3 billion) in industry loans for the development of eco-friendly cars. On Monday, the Commission agreed to let automakers adopt new carbon-dioxide rules between 2012 and 2015, rather than simply by 2012 as initially proposed.

Meanwhile, in the United States, the "Big Three"--Ford, General Motors and Chrysler--are preparing for a second attempt at getting the government bailout they say they need to survive. Press reports have claimed that GM is hoping to renegotiate union pay deals, as well as potentially selling its Swedish brand Saab. Shares of Peugeot-Citroen slumped 2.5%, or 34 euro cents (43 cents), to 13.16 euros ($16.65), during morning trading in Paris. Renault was down 1.8%, while Porsche slipped 0.9%, in Frankfurt.

Germany lashed out at the European Commission on Tuesday for delaying approval of a €8.2bn ($10.4bn) government capital injection into Commerzbank, Germany’s second biggest commercial bank. “We do not approve of the schedule, the procedure and above all the Commission’s speed,” Peer Steinbrück, Germany’s finance minister, said. He was speaking on the sidelines of a meeting of European Union finance ministers devoted largely to the question of how big a fiscal stimulus the EU should adopt to fight Europe’s economic recession.

The Commission rejected Mr Steinbrück’s criticisms, saying it had shown it was capable of taking state aid decisions within as little as 24 hours, so long as the parties concerned gave it all the necessary information. The Commission began examining Commerzbank’s capital injection in early November, after receiving reports that the interest rate to be paid by the bank did not conform with a German government rescue scheme for banks that the Commission had approved one week earlier. The Commission explained that it had a duty to ensure a level playing field in the EU, so that national state aid schemes for banks did not lead to distortions of competition in the EU’s internal market.

Commerzbank, which is in the process of acquiring Dresdner bank from Allianz, the giant German insurer, was the first commercial German bank to apply for aid under the government’s €500bn rescue plan for the financial industry. Commerzbank said it would pay 8.5 per cent interest on a first tranche of government capital and 5.5 per cent on a second tranche. “If the protective measures we’ve organised in Germany and other European countries are to work in this crisis, we must have a secure framework very quickly for the banks,” Mr Steinbrück said. “Otherwise they won’t make use of these protective measures and we will deepen the financial market crisis. That’s our main message to the Commission.”

Mr Steinbrück’s criticisms of the handling of bank recapitalisations were echoed by Sweden. “We have to call off these legions of state aid bureaucrats,” declared Anders Borg, Sweden’s finance minister. There is similar frustration in France at the Commission’s decision to study a French government bail-out plan for banks carefully to make sure it does not break EU rules. Mr Steinbrück, commenting on the Commission’s proposal that the EU should adopt a co-ordinated, €200bn fiscal stimulus to pump up demand and lift Europe out of recession, made clear Germany’s concern about the potential impact on national budget deficits and the EU’s stability and growth pact, its fiscal rulebook. “I would question whether a deficit of 6 or 7 or 8 per cent [of gross domestic product] contributes to the stability of the pact,” he said.

Bargain-hunting holiday shoppers did not save U.S. retail sales in November, which will likely represent a second straight month of declines for the industry. Sales during last week's Black Friday, the traditional kickoff of the holiday shopping season, were better than many analysts expected. But the growth likely came at the expense of margins as stores cut prices aggressively. That means investors will look not only for December sales forecasts when retailers report November sales this week, but also for comments on margins and earnings.

"They are just going to have to suck it up and take a hit on the margin side this season," said Ken Perkins, president of Retail Metrics. Perkins has forecast a 1.7 percent decline in November sales at stores open at least a year. But with the job market continuing to weaken, retailers that succeed will have to continue to offer the best discounts. "It seems like everything is about price point right now. If you weren't on sale, you're probably not selling right now," Perkins said.

Analysts on average expect a 2.5 percent decline in November same-store sales, according to Thomson Reuters data. That would be the biggest drop since Thomson Reuters began collecting same-store sales data in 2000. Excluding Wal-Mart Stores Inc, which has been the big winner as shoppers look to save money, the decline is 7.1 percent. Thomson Reuters said on November 6 its October same-store sales index fell 0.7 percent, worse than its estimate for a 0.3 percent drop.

For most of November, consumers cut spending sharply as access to credit tightened, home values fell and costs remained high for essentials like food. "The remainder of the month was largely a dud as the credit crunch continues to stifle consumer spending," Oppenheimer analyst Robert Samuels said in a research note. The timing of the U.S. Thanksgiving holiday, which fell later in the month this year, also hurt sales, analysts said. Mild weather cut into sales of winter apparel. "Even in normal circumstances, the loss of a week of post-Thanksgiving sales would have resulted in a weak November," Brean Murray, Carret & Co analyst Eric Beder said in a research note.

"When the current economic malaise and slightly warmer weather are added to the mix, the potential for any positive results becomes remote." But Beder also said that investor expectations for retailers have reached a low, giving the sector a chance to bounce back in December. The Standard & Poor's retail index is down about 20 percent since the end of October. Among retailers, Wal-Mart's steady focus on offering low prices will keep it ahead of rivals, analysts said. The world's largest retailer had been aggressively promoting toys and food in the weeks leading up to Black Friday.

Analysts on average forecast a 2 percent increase in same-store sales for the discounter, one of the few retailers expected to show a rise in November, according to Thomson Reuters. Rival Target Corp is expected to post a 9.1 percent decline. Target had forecast a decline of 6 percent to 9 percent, with half the decline due to the later Thanksgiving. Overall, department stores like Kohl's and J.C. Penney are expected to post an overall 14.5 percent decline. Apparel retailers' same-store sales are expected to drop 11.6 percent and teen and children's apparel is forecast to fall 12.3 percent..

Twenty per cent of people plan to buy a smaller turkey this year, while a further 20 per cent will buy a crown rather than a whole bird - and 23 per cent will choose an alternative meat. A total of 61.5 per cent of those surveyed say that they will be making more festive food from scratch than they did last Christmas.

Of respondents who splashed out on ready-made treats last year, 63 per cent plan to make their own mince pies this year while 41 per cent will make their own stuffing and 33 per cent will make their own Christmas cake. One in four will make Christmas pudding, 29 per cent trifle, 22.5 per cent bread sauce, 23 per cent cranberry sauce and 31.5 per cent gravy. However, it seems that some areas are not up for debate when it comes to cutting costs. Almost half - 47 per cent - of respondents say they are not prepared to compromise on alcohol in general; 23 per cent on champagne; 31 per cent on ham and 27 per cent on smoked salmon.

The survey of 3,558 Britons by delicious. magazine showed that in all 60 per cent of respondents said the credit crunch will affect their food shopping this Christmas. The delicious. survey revealed a widespread return to home cooking in the wake of the credit crunch, with 54 per cent of respondents making more meals from scratch over the past year. Eighty six per cent are using more recipes from magazines, 39 per cent are making freeze ahead meals, 40 per cent have started taking lunch to work over the past year and 82.5 per cent are eating out less. The research also shows that food shopping habits have undergone a shift. Eighty per cent of respondents say they've tried to find ways to cut their food bill over the past year and 40 per cent think their former food shopping habits were wasteful.

More than two thirds - 68.5 per cent - have started trying budget supermarkets over the past year while 37 per cent have started making a shopping list and sticking to it. Almost half - 47per cent - per cent are buying more own brand products, 59 per cent have stopped making impulse buys and 70 per cent are taking advantage of buy-one-get-one-free deals on offer. And there even seem to be some positive health benefits from the changes, according to the report. Forty per cent of those surveyed are buying more fresh seasonal produce, 47 per cent are buying less desserts, 43 per cent are buying fewer cakes, 39 per cent are buying fewer fresh ready meals, 29 per cent are buying fewer frozen ready meals, 42 per cent fewer crisps and snacks, and 58 per cent are throwing away less food .

Call it crisis eclipse. The global food crisis that dominated headlines earlier this year has been overshadowed by this fall's financial crisis, but it continues to exact a crippling toll on the world's poor. And, although commodity prices for a wide range of crops have fallen by as much as 50 percent from record highs in June, the financial crisis is expected to make it dramatically worse: credit for farmers could dry up, meaning less money to buy fertilizer and seed, leading in turn to greater global shortages of food. Money for food aid could dry up as well. In June, governments and donors pledged $12.3 billion for the food crisis. So far, only $1 billion has actually been disbursed, as lending institutions and governments instead scramble to save ailing banks.

"My concern is that with the food crisis out of the headlines, policymakers will assume it's not a problem. Another worry is that, [with the financial crisis], there will simply be less money to invest in agriculture. We've got to turn that around," says Robert Ziegler, the director general of the International Rice Research Institute (IRRI) in the Philippines. Some factors contributing to the food crisis have ebbed, which adds to the notion that the worst is over. The price of oil, needed to transport food to markets, has dropped from July highs of nearly $150 a barrel to around $50 today. Corn, soybean, and wheat prices have fallen about 50 percent from record highs earlier in the year. And many of the restrictions set by grain-exporting governments like Vietnam, China and India – all of whom feared shortages and effectively hoarded grain supplies, causing prices to shoot up further – have now been eased, meaning supplies have stabilized and prices have come down accordingly.

Still, a country like Cambodia helps illustrate that lower prices have not ended the crisis. The price of rice – the country's staple food – has gone down by about 7 percent since August. But observers say that's not enough to offset the staggering 25 percent inflation of the last year. "Workers already spend about 70 percent of their income on food. Prices have gone down, but they're still higher than other years. If you look at people's income versus inflation, many more are poor today," says Yang Saing Koma, president of the Cambodian Center for Study and Development of Agriculture, a think tank in the country's capital, Phnom Penh. In fact, the Asian Development Bank estimates that 2 million more Cambodians may have been pushed into poverty.

The problem is playing out across the globe: food prices rose by 24 percent in 2007, pushing 75 million more people into chronic hunger, estimates the United Nations' Food and Agricultural Organization (FAO). In 2008, food prices surged again by 51 percent, meaning that millions more are likely to join the 923 million people already suffering from malnutrition. World food prices have come down by a modest 6 percent since September, the FAO estimates, but that can't reverse the damage already wreaking its way across the globe. "Food prices are dropping, which is great, but its entirely too early to say that the food crisis is over," says Marcus Prior, a spokesman for the UN's World Food Program (WFP) in Nairobi, Kenya.

He points out that the food crisis is taking its greatest toll on sub-Saharan Africa, where 1 in 3 people were already estimated to be chronically hungry before the crisis. Last year, staggering food inflation added another 24 million people to the total of malnourished. "We've seen people have to make decisions, taking their children out of school … so the children can help with work," says Mr. Prior, adding that Somalia, northern Kenya, northern Uganda and Ethiopia are among the hardest hit, because of conflict, drought, and successive harvest failures. In Southern Africa, many subsistence farmers already suffer from high rates of HIV/AIDS.

The food crisis has made them particularly vulnerable. "They can't produce as much because they're spending their resources on healthcare," says Richard Lee, a WFP spokesman in Zimbabwe. Zimbabwe has emerged as a flashpoint, with the UN already feeding four million people there. Money is running out, and the UN fears a full-scale humanitarian crisis by January. "The problem in Zimbabwe is [lack of] access to any food," says Mr. Lee. "People in rural areas, some of them harvested nothing, some of them harvested very little. It's a very serious situation." "The impact of the food crisis starts today," says Mr. Ziegler of IRRI. "If you consider a child under the age of 3, if they're malnourished for even three months, they're affected for a lifetime. It will affect an entire generation."

The financial crisis is now adding its own plague of threats. Here in Cambodia, rice millers tend to borrow money from banks to pay farmers and to mill their rice. As banks seize up credit due to global recession fears, some mills are having trouble paying farmers, explains Mr. Koma. Farmers in turn, after borrowing heavily for fertilizer, are operating at a loss. For farmers elsewhere in the world, the financial crisis is creating a similarly sobering equation: it costs more money for them to grow, but they receive a lower price for their products at market – making growing food a risky venture.

"I could see some declines in production because of falling prices," says David Dawe, a senior economist at the FAO in Rome, adding that the credit crunch might also cut into production, although not as much as lower prices. In Brazil, for example, production of corn may drop by 20 percent, while wheat production globally may drop by more than 4 percent, Bloomberg recently reported. Solutions to the food crisis remain the same as before the financial crisis: massive investments are neede in agriculture and food aid programs. But now, it's more urgent.

The irony, experts say, is that many new grain technologies that can help expand food production are ready for implementation. But it will require money to get those technologies to farmers – money that may now be diverted to rescuing ailing banks. "Research is a pipeline, and a lot of the products we've developed are ready and we have to get them out to farmers," says Ziegler. "It would be a shame for that not to happen." Responses so far have resulted in governments restructuring finances to invigorate agricultural development and ease inflation.

The African Development Bank recently augmented its agricultural portfolio by $1 billion, allocating a total of $4.8 billion. In Senegal, investments in agriculture will rise to $106 million, up from $58 last year. From Vietnam to Ethiopia, governments have slashed grain prices and fuel prices, and allocated money for school food programs. Lending agencies have moved fast to disburse cash. The World Bank reports that, as of September, it had approved $83 million for 10 African countries, including money for school food programs and medical supplies.

Emergency food is being delivered, by the WFP and others. In Ethiopia, 6.6 million people are already beneficiaries of WFP food aid, and 2 million in Sudan. In Cambodia, school food programs, which were earlier cut back, have been resumed, targeting 250,000 children. In Afghanistan, nearly 200,000 metric tons of food are being delivered to assist 4.5 million people. There is still a long way to go, experts warn. Some $20 billion will be needed to stave off the food crisis, the UN estimates. Money is coming in, but not fast enough. "Despite enthusiastic speeches and financial commitments, we have received only a tiny part of what was pledged," Jacques Diouf, the head of the UN food agency, said at a gathering for World Food Day in late October.

Cheaper oil is diluting demand for energy efficiency in Europe, and tighter financing is making it difficult for rewable energy companies to expand, or even survive. It was only a matter of time. As the impact of the global financial crisis spreads into all corners of the economy, Europe's world-beating green energy sector is starting to feel the pinch. Plunging oil prices have made renewable energy sources relatively less cost-effective, while thinner profit margins have prompted big industrial users of power to tighten their budgets for sustainable energy programs -- cutting into sales by green energy suppliers.

At the same time, the rising cost of capital is making it harder for both consumer and suppliers of alternative energy equipment and services to finance new green projects. The impact will be felt especially acutely by small, independent manufacturers and electricity producers, some of whom could go out of business or be forced to sell out to larger companies. "Small companies are more fragile, and some will have difficulties in financing their projects," says Colette Lewiner, global energy, utilities, and chemicals leader at consultancy Capgemini.

It's a dramatic change from just a few months ago. Earlier this year, European alternative energy companies such as German solar panel manufacturer Q-Cells and Danish wind-turbine maker Vestas were scrambling to keep up with global demand as prices for solar cells and wind turbines soared. Regulatory carbon reduction requirements in Europe and elsewhere, coupled with rising public eco-consciousness, promised a bright future for renewable power.

Now, with demand weakening and prices in decline, the green sector is hoping for more government support to carry it through the economic turmoil. Many forms of alternative energy already enjoy government subsidies to move the cost of green power closer to parity with cheaper fossil fuels. Now companies are looking for direct investments by governments in clean energy projects.

Politicians already are responding. On Nov. 17, the French government created a new feed-in electricity tariff that will subsidize the use of solar power. Under the plan, which mirrors similar incentives already available in Spain and Germany, electricity producers that invest in solar will be paid an above-market rate for the power they generate. By 2020, France hopes to increase the supply of domestic solar energy 400-fold and produce 23 percent of its entire electric output from renewables, compared with the current 10.4 percent figure.

The European Union is also getting into the act. On Nov. 26, the European Commission announced a €200 billion ($252 billion) economy recovery plan that includes targeted investments in carbon reduction as a linchpin to reignite Europe's struggling economy. The programs may include additional green energy subsidies and support for energy efficiency by consumers. "We're going to see a lot of money from the public sector spent to help eco-friendly projects," says Martin Porter, managing director of policy think tank The Centre in Brussels. "It's a good way to combine an economic response to the financial crisis with long-term goals of sustainability and CO2 cuts."

Aside from support in the Old World, the European green energy sector may be able to take advantage of an unexpected new source of backing: the United States. President-elect Barack Obama is expected to focus some of his estimated $700 billion stimulus package on eco-friendly businesses. Denmark's Vestas, for example, already manufactures wind turbines in the US and could be well placed to profit from government investment in clean technology. Iberian renewable energy producers Iberdrola Renovables (EBER.F) and EDP Renovaveis (EDPR.LS)—already America's second- and third-largest wind energy producers, respectively -- similarly stand to benefit from federal assistance for renewables.

Renewed government intervention comes after years of steady private-sector investment in Europe's green sector, which has placed the Old World at the forefront of tackling climate change. The EU Emission Trading Scheme -- which assigns an amount of CO2 companies can emit each year, then allows them to trade these allowances in an open market -- has led utilities to spend billions of dollars on renewables to cut their carbon footprints.

Yet as the price of oil has tumbled from its record high in July 2008, the cost of offsetting CO2 emissions also has halved over the same period. Without this economic incentive to invest in green energy, companies have started to curtail their spending on solar, wind, and other environmentally friendly technologies. "With the oil and natural gas prices falling, the competitive case for renewables won't be as strong," says Capgemini's Lewiner.

Despite the expected state aid for green energy, market watchers still expect a number of renewables firms -- particularly those that are highly leveraged -- to fall afoul of the economic downturn. The combination of slack demand and higher project financing costs could be too much for weaker players. The result could be a round of merger and acquisition activity as larger, better-funded companies swoop in. Big utilities like France's EDF and Spain's Iberdrola are among the most likely buyers.

No matter which companies survive the current financial crisis, extra state investment certainly will be necessary to get the European renewables sector through the storm. While some may decry yet more governmental involvement in the economy, in this case politicians have little choice. Caught between an economic crisis and tough CO2 reduction commitments, leaders have to keep the green sector alive or risk blowing past their carbon targets -- and potentially facing further problems down the road from global climate change.

Evidence of a global slide towards a deep recession mounted on Monday with severe strain reported by manufacturing companies around the world, large falls in car sales across Europe and bad construction figures in the US. So clear were the signs of downturn in the US that the National Bureau of Economic Research, the most prestigious US independent economic authority, said the country had been in recession since December 2007. The gloom prompted a near 9 per cent fall in the S&P 500 index, reversing gains made last week, while the 10-year Treasury yield fell to its lowest level for more than half a century.

The NBER academics define a recession as “a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in production, employment, real income, and other indicators”. But Ben Bernanke, US Federal Reserve chairman, sought to allay concerns that the US was entering a period of economic stress on par with the Great Depression. “Let’s put that out of our minds,” Mr Bernanke said in a speech in Austin, Texas. “There’s no comparison in terms of severity.”

Mr Bernanke surprised the bond market by saying the central bank may purchase “substantial quantities” of US Treasuries in the open market, suggesting that the Fed must use other means to stimulate the economy as conventional interest rate policy becomes constrained. His remarks prompted a sharp decline in Treasury yields, with the yield on the 10-year note falling to a low of 2.66 per cent, down from 2.84 per cent before Mr Bernanke started speaking. The 10-year yield is at its lowest level since 1955. Surveys of manufacturing orders in the US, Europe and China published on Monday were much weaker than expected. In China, the purchasing managers index compiled by the government-linked China Federation of Logistics and Purchasing fell from 44.6 in October to 38.8 last month, the lowest reading since the series started in 2005.

The eurozone manufacturing PMI figures also hit a series low. In the US, equivalent data from the Institute for Supply Management showed manufacturing activity suffered a further slowdown last month to a 26-year low. New car sales slumped across the world, including a near 50 per cent fall in Spain. The global weakness hit equity markets with FTSE Eurofirst 300 falling 6 per cent. The S&P 500 index fell 8.93 per cent to close at 816.21. Volatility also reigned on the currency markets. Of particular concern was the Chinese central bank’s announcement of a relatively big one-day drop in the value of the renminbi against the US dollar.

The government's recent moves to backstop the mortgage market have made it easier for many people with decent credit scores to get a loan. But for many self-employed people -- even those with pristine credit -- the mortgage freeze has yet to thaw. A reversal of the loose lending practices that led to the banking industry's current woes was certainly expected. But some economists and mortgage brokers say lending standards have become overly restrictive, which could be exacerbating the credit crunch and helping push down home prices further.

Some self-employed professionals are not benefiting from federal moves to loosen the mortgage market. The volume of jumbo loans -- those that exceed limits for government backing -- fell by more than 70% for the first nine months of the year from a year earlier. "Underwriting criteria have swung from foolish ease to tighter than any in modern times," says Lou Barnes, a mortgage banker in Boulder, Colo.

The changes are increasingly frustrating a group of borrowers whom banks once coveted: affluent self-employed professionals such as doctors, lawyers, accountants and small-business owners. Hubert Noguera, a 38-year-old medical-device engineer who also owns a small business, is one of them. He can't get approved for a loan, even though he has a strong 800 credit score and is prepared to make a 40% down payment on a house near San Francisco in the $800,000-to-$900,000 range. Mr. Noguera says he has assets worth three times the $500,000 loan he's requesting and is in the process of selling his share of a recently inherited residence in Saratoga, Calif., worth $1.1 million.

Banks have turned down the loan because the amount he's requesting appears high relative to the portion of his income that he can fully document -- and they won't consider his other income, says his mortgage broker, Connie Madrid. "My blood type is O positive. What else do they want?" Mr. Noguera recalls asking Ms. Madrid.

The chief problem for self-employed people is that they don't have W-2 forms from an employer to document their full wages. For proof of income, they must rely solely on their income-tax returns. But income for the self-employed is often understated for tax purposes, in part because they tend to take large business-related deductions. Self-employed borrowers who don't take any big deductions won't likely face the same difficulty getting a loan.

"When you're self-employed, the write-offs that you use help at tax time -- but that means when you apply for a loan, your income won't reflect your cash flow," says Richard Redmond, a mortgage broker in Larkspur, Calif. Lenders are also cautious because nonsalaried workers can see greater volatility in their annual income.

In the past, most self-employed people took out "stated-income loans," which don't require borrowers to fully document their income. Such borrowers typically made substantial down payments, had strong credit profiles and paid a slight premium -- around 0.25 percentage point -- on their interest rates. Defaults were low. That changed as the loans grew in popularity during the housing boom and expanded beyond their traditional market of affluent professionals. Stated-income loans eventually became disparaged as "liar's loans" because borrowers' incomes were frequently exaggerated.

Many banks have eliminated stated-income loans entirely, and Freddie Mac -- which, with Fannie Mae, is one of two government-held buyers of mortgages -- will end its stated-income lending program designed for self-employed borrowers next month. "If the market stays as it is, we've frozen thousands and thousands of good borrowers out of the mortgage market," says Peter Ogilvie, past president of the California Association of Mortgage Brokers. "People who've demonstrated they can pay their bills cannot get a mortgage -- and that's people who have homes."

Mr. Noguera's loan hasn't been approved because he receives part of his income from a human-resources consulting business that he also inherited last year, but lenders won't count income from the firm because he doesn't have two years of reported earnings. "Six months ago, I know I could have done this no problem," says Ms. Madrid, his broker. She says that even the loan officer at Wells Fargo & Co., for example, was surprised that the loan couldn't be approved. A Wells Fargo spokesman wouldn't comment on the particular case, but said in a statement: "Like everyone else in financial services, Wells Fargo has adjusted underwriting standards to effectively manage risk in this difficult credit environment."

This part of the market is tightening despite the government's attempts to jump-start mortgage activity. Earlier this year, it approved larger loan limits for Fannie Mae, Freddie Mac and the Federal Housing Administration. Last week, the government announced it would buy $600 billion worth of mortgage-backed securities and debt from Fannie and Freddie, which helped push down mortgage rates on government-backed loans by a third of a percentage point.

Self-employed borrowers aren't the only ones finding themselves shut out despite having good credit and savings. Lenders have also sharply tightened requirements for so-called jumbo loans, which are too big to qualify for government backing. That's because banks are relying heavily on loans guaranteed by Fannie and Freddie and the FHA, which have loan limits that vary by market from $417,000 to $729,000. Government-backed lending now accounts for 87% of loan volume, according to Inside Mortgage Finance, a trade publication.

At J.P. Morgan Chase & Co., for example, more than 95% of mortgage originations are now sold to a government agency. In certain distressed markets, such as South Florida, J.P. Morgan Chase won't go above a 60% loan-to-value on jumbo mortgages. Overall, jumbo-loan originations declined 71% to $87 billion in the first nine months of 2008 from $303 billion during the same period last year, according to Inside Mortgage Finance.

Those who can get a jumbo loan are finding them very expensive. Rates on jumbo loans averaged 7.49% last week, nearly 1.6 percentage points above the rates on loans eligible for government backing, according to HSH Associates, financial publishers in Pompton Plains, N.J. The gap widened from 1.3 percentage points two weeks ago. In July 2007, the gap between the two was as little as 0.25 percentage point.

Mike Castrichini, a chiropractor in Scottsdale, Ariz., has been caught between the tightened jumbo market and the disappearance of stated-income loans, which he says he's used for more than a decade without any problem. He's been unable to find a lender willing to refinance the $900,000 adjustable-rate mortgage on his primary residence, which he says is worth around $1.1 million now, down from $1.8 million a few years ago. "Nobody will touch the loan," says Steve Walsh, his mortgage broker.

The 42-year-old Mr. Castrichini, who has a solid 787 credit score, owns his two offices and a small strip mall in Illinois. Even if he's approved for the loan, he laments the fact that he is facing a much higher interest rate. "I'm going to have to cut back," he says, expressing concern that he'll be unable to keep his children in private school.

Banks, meanwhile, are tightening their requirements beyond those of Fannie and Freddie. J.P. Morgan Chase, for instance, has set tighter standards than the agencies for loans that exceed 80% of the home's value and has stopped making loans for second homes and condos in Florida, according to a recent investor presentation. "No one wants to be stuck with a loan," says Mr. Walsh, the Arizona broker. He says underwriters he works with have been told they'll be fired if a loan they originate can't be sold to Fannie, Freddie or the FHA.

Lenders have tighter standards than government agencies because they "usually have a more granular understanding of where credit losses are coming from," says Sanjiv Das, chief executive of Citigroup Inc.'s CitiMortgage unit. Lenders say they are also concerned that Fannie and Freddie will force them to repurchase delinquent loans. Brokers say there's little borrowers can do to improve their chances of getting a loan right now, but that they can prepare themselves once guidelines ease. The most important steps include maintaining a stellar credit rating and being able to show liquid assets. Borrowers who can't get a jumbo loan will have a better chance at getting a so-called conforming loan -- one not exceeding $417,000, with a higher ceiling in some markets.

Mr. Redmond, the California broker, says he sees enough rejected borrowers with strong credit that he is setting up a $15 million private lending fund targeting those good credit risks. He warns that the inability of creditworthy borrowers to refinance mortgages, particularly those that have rising rates, could spur forced sales and further depress home values. "Fannie and Freddie can sit on the stoop with buckets of cheap money, but if they have raised the bar too high for the borrowers to get at it, it doesn't matter," he says.

Earlier this year, Mark Cummuta walked away from a chance to become the No. 2 executive of a Chicago technology consultancy -- for less than $100,000. As the sole breadwinner and father of triplets, Mr. Cummuta couldn't afford a nearly 20% cut in pay, compared with what he was earning as an independent management consultant. He's still looking for a permanent position. "Every now and then, I hit myself and say, 'I should have taken that offer,'" concedes the consultant, who has helped several firms navigate difficult times since 2003.

Unfortunately, Mr. Cummuta is hardly unique. More battered businesses are giving new hires less money than they made in their last job. "I am seeing that a lot more," says April M. Williams, a career coach in Algonquin, Ill. Puny amounts flabbergast some of her clients."As the downturn deepens, an increasing number of job seekers will find themselves getting lower-paying offers," says Mark Royal, a senior consultant at Hay Group. "We are on the cusp of a trend."

But excess eagerness to toil for fewer bucks sends the wrong signal. Such applicants often "are really desperate," says Niki Leondakis, chief operating officer at Kimpton Hotels & Restaurants, a boutique chain in San Francisco. Rather than immediately reject or accept a lowball deal, you should mount a careful counterattack, experts recommend. You could improve your chances of winning a satisfactory compromise, with tradeoffs ranging from a faster pay review to extra perquisites.

Arm yourself with data about the going rate for your position by trolling Web sites such as www.Salary.com, indeed.com/salary, salaryexpert.com and Glassdoor.com. You'll see whether a concern "has poor information about the external market" and rewards staffers below prevailing levels, says Robin Pinkley, a professor at Southern Methodist University's business school and author of books about pay negotiations. As part of your homework, you must grasp a potential employer's problems so you can promote yourself as a problem solver worth more than the proposed skimpy pay. "To negotiate in tough times, you have to be able to create a vision," says Jim Camp, an author and president of Camp Group, a negotiation-consulting firm in Dublin, Ohio.

A big New York law firm recently agreed to hire an Ohio lawyer for $140 an hour, $40 an hour less than he was earning. The firm blamed tough times. But the attorney knew he could provide important client referrals, recalls Mr. Camp, who coached him. "What number would I be paid if I brought a million-dollar client?" the candidate asked firm officials. "If you're a rainmaker, the numbers change," they replied, according to Mr. Camp. After further interviews, the firm raised his starting pay to $240 an hour. He began last summer.

A West Coast executive took this tactic a step further. Keen to enter senior management several years ago, she hoped to accept a vice presidency at a midsize manufacturer -- and keep making over $300,000 a year. But the concern offered less than $200,000, the same cash compensation it gave other VPs.

The woman prepared a Power Point presentation for the chief executive, highlighting accomplishments he didn't know about and describing ways she might bolster customer satisfaction. She says she also sold him on a quarterly bonus plan for herself, linked to measurable milestones needed for the manufacturer's long-term growth. The CEO enlarged her package by nearly $25,000. And she racked up bonuses fast enough that she was paid nearly $300,000 within a year. "It was a win-win for the company," she notes.

Some job hunters weighing lower offers bargain for alternative rewards, such as flexible hours, extra vacation, special training or a gym membership. Not everyone can long survive on a shrunken paycheck, however. PeaceKeeper Cause-Metrics, a small cosmetics distributor, offered Stephanie S. Hayano a $50,000 salary to be its chief operating officer starting last January. She previously earned $300,000 a year running Natural Health Trends Corp. The puny pay wouldn't have even covered mortgages for her three residences. "Unless I was prepared to totally change my lifestyle, $50,000 was not in the cards," Ms. Hayano says. She assumed the COO title at the New York firm, but gets compensated as a part-time consultant and retains other consulting gigs.

It's a good idea to assess the long-term career impact of toiling for less. Younger individuals, for instance, might get a valuable opportunity to build their résumés. That proved true for Sanjay Gupta. In 1994, the 26-year-old senior marketing analyst accepted 10% lower pay when he transferred to a database marketing job at his employer, FedEx Corp. He and his wife were forced to dine out less often. However, Mr. Gupta says that he gained experience "with every facet of marketing," a critical skill for becoming a chief marketing officer of a big business some day. He achieved that title last March, when GMAC Financial Services named him CMO.

Cheaper oil is diluting demand for energy efficiency in Europe and tighter financing is making it difficult for rewable energy companies to expand, or even survive. It was only a matter of time. As the impact of the global financial crisis spreads into all corners of the economy, Europe's world-beating green energy sector is starting to feel the pinch. Plunging oil prices have made renewable energy sources relatively less cost-effective, while thinner profit margins have prompted big industrial users of power to tighten their budgets for sustainable energy programs -- cutting into sales by green energy suppliers.

At the same time, the rising cost of capital is making it harder for both consumer and suppliers of alternative energy equipment and services to finance new green projects. The impact will be felt especially acutely by small, independent manufacturers and electricity producers, some of whom could go out of business or be forced to sell out to larger companies. "Small companies are more fragile, and some will have difficulties in financing their projects," says Colette Lewiner, global energy, utilities, and chemicals leader at consultancy Capgemini. It's a dramatic change from just a few months ago. Earlier this year, European alternative energy companies such as German solar panel manufacturer Q-Cells and Danish wind-turbine maker Vestas were scrambling to keep up with global demand as prices for solar cells and wind turbines soared. Regulatory carbon reduction requirements in Europe and elsewhere, coupled with rising public eco-consciousness, promised a bright future for renewable power.

Now, with demand weakening and prices in decline, the green sector is hoping for more government support to carry it through the economic turmoil. Many forms of alternative energy already enjoy government subsidies to move the cost of green power closer to parity with cheaper fossil fuels. Now companies are looking for direct investments by governments in clean energy projects. Politicians already are responding. On Nov. 17, the French government created a new feed-in electricity tariff that will subsidize the use of solar power. Under the plan, which mirrors similar incentives already available in Spain and Germany, electricity producers that invest in solar will be paid an above-market rate for the power they generate. By 2020, France hopes to increase the supply of domestic solar energy 400-fold and produce 23 percent of its entire electric output from renewables, compared with the current 10.4 percent figure.

The European Union is also getting into the act. On Nov. 26, the European Commission announced a €200 billion ($252 billion) economy recovery plan that includes targeted investments in carbon reduction as a linchpin to reignite Europe's struggling economy. The programs may include additional green energy subsidies and support for energy efficiency by consumers. "We're going to see a lot of money from the public sector spent to help eco-friendly projects," says Martin Porter, managing director of policy think tank The Centre in Brussels. "It's a good way to combine an economic response to the financial crisis with long-term goals of sustainability and CO2 cuts."

Aside from support in the Old World, the European green energy sector may be able to take advantage of an unexpected new source of backing: the United States. President-elect Barack Obama is expected to focus some of his estimated $700 billion stimulus package on eco-friendly businesses. Denmark's Vestas, for example, already manufactures wind turbines in the US and could be well placed to profit from government investment in clean technology. Iberian renewable energy producers Iberdrola Renovables (EBER.F) and EDP Renovaveis (EDPR.LS)—already America's second- and third-largest wind energy producers, respectively -- similarly stand to benefit from federal assistance for renewables. Renewed government intervention comes after years of steady private-sector investment in Europe's green sector, which has placed the Old World at the forefront of tackling climate change. The EU Emission Trading Scheme -- which assigns an amount of CO2 companies can emit each year, then allows them to trade these allowances in an open market -- has led utilities to spend billions of dollars on renewables to cut their carbon footprints.

Yet as the price of oil has tumbled from its record high in July 2008, the cost of offsetting CO2 emissions also has halved over the same period. Without this economic incentive to invest in green energy, companies have started to curtail their spending on solar, wind, and other environmentally friendly technologies. "With the oil and natural gas prices falling, the competitive case for renewables won't be as strong," says Capgemini's Lewiner.Despite the expected state aid for green energy, market watchers still expect a number of renewables firms -- particularly those that are highly leveraged -- to fall afoul of the economic downturn. The combination of slack demand and higher project financing costs could be too much for weaker players. The result could be a round of merger and acquisition activity as larger, better-funded companies swoop in. Big utilities like France's EDF and Spain's Iberdrola are among the most likely buyers.

No matter which companies survive the current financial crisis, extra state investment certainly will be necessary to get the European renewables sector through the storm. While some may decry yet more governmental involvement in the economy, in this case politicians have little choice. Caught between an economic crisis and tough CO2 reduction commitments, leaders have to keep the green sector alive or risk blowing past their carbon targets -- and potentially facing further problems down the road from global climate change.

Over the past few years, Americans have had a brutal lesson in the risks of real estate. House prices have crashed more than 35% in some parts of the country, millions of people are losing their homes to foreclosure, and banks are failing. The takeaway? Many Americans still see real estate as their best shot at wealth. In survey after survey, people expect prices to bounce back -- in some cases, as soon as six months from now.

Those hoping for a quick rebound are likely to be disappointed. Economists and other pros generally say home prices won't bottom out before the second half of 2009, and some don't see a bottom until 2011 or 2012. Even when they stop falling, prices may scrape along the bottom of the rut for years. And longer term? Over the next 10 to 20 years, housing economists expect prices will rise again -- but, on average, probably not nearly as much as they've averaged over the past decade. That isn't to say that some places won't experience booms (and busts). But, the experts say, you should generally expect house prices to rise just a bit more than inflation and roughly in line with household income.

Karl Case, an economics professor at Wellesley College whose name adorns the S&P Case-Shiller home-price indexes, has studied U.S. house prices going back to the 1890s. Over the long run, he says, home prices tend to increase on average at an inflation-adjusted rate of 2.5% to 3% a year, about the same as per capita income. He thinks that long-run pattern is likely to continue, despite the recent choppiness.

Other experts make similarly modest predictions. William Wheaton, a professor of economics and real estate at the Massachusetts Institute of Technology, says he expects house prices to increase at a rate roughly one percentage point higher than inflation over the long term. Celia Chen, director of housing economics at Moody's Economy.com, a research firm, expects house prices to increase an average of around 4% a year over the next couple of decades.

Some experts say it's a bad idea to count on your home rising in value at all. People should think of their own homes mainly as places to live, not as investments, advises Kenneth Rosen, chairman of the Fisher Center for Real Estate at the University of California, Berkeley. Sure, home mortgages provide tax benefits, and most homes appreciate in value over the long run, he says, but there is always risk.

For all of those forecasts, many Americans are undaunted. Consider three surveys, all from October. In a poll of 2,000 adults, real-estate-data provider Zillow.com found that 61% believed the value of their home would either remain level or rise over the next six months. Another survey of more than 1,000 homeowners, sponsored by real-estate-services firm Realogy Corp., found that 91% thought that owning a home was the best long-term investment they could make. And an online survey of 5,000 people commissioned by Citigroup found that just 32% believed it was a good time to invest in stocks -- but 51% said it was a good time to buy a home.

The S&P/Case-Shiller home-price index showed accelerating price declines in September. See a sortable chart of home prices, by metro area. "I just believe in real estate," says Jason Schram, a lawyer in Chicago who has bought two rental properties this year at what he considers fire-sale prices. "I've seen over and over people I know build wealth through rental real estate, and that's the path I intend taking, even though it's a bit bumpy at the moment."

So, as homeowners and buyers look ahead, what factors will determine whether their homes are really likely to rise in value, rather than just in their dreams? What are some of the bullish signs -- and some of the bearish ones? In the long term, house prices are driven by fundamentals that are hard to predict: immigration, birth rates, the size and nature of households, and incomes. The trick is to figure out where job and income growth will be strongest and where immigrants and others will want to live.

William Frey, a demographer and senior fellow at the Brookings Institution, a think tank in Washington, says young people and immigrants are likely to flow to Florida, Georgia, the Carolinas, Tennessee, Virginia, Nevada, Arizona and some of the more affordable interior parts of California. These areas generally have lower housing costs than the Pacific Coast or Northeast and job growth from modern industries and leisure businesses, he says. Areas with little immigration and low growth or falling populations are likely to include Michigan, Ohio, the Dakotas, Iowa, western Pennsylvania and upstate New York, Mr. Frey says.

Newland Communities LLC, a San Diego-based planner and developer of neighborhoods, employs a full-time researcher to study long-term housing demand and ranks metro areas in terms of their growth prospects. Among those near the top of Newland's hit parade are Washington, D.C., Raleigh and Charlotte, N.C., Atlanta, Dallas, Houston, Phoenix and Las Vegas, says Robert McLeod, the developer's chief executive.

All of them, Newland believes, will keep growing because they have well-diversified regional economies and other attractions, including mild climates. With the exception of Washington, they all have fairly affordable housing costs. Washington has a highly educated work force, high incomes, a stable source of government-related jobs and rapidly expanding technology firms, Newland says.

"The older industrial cities are going to suffer" from shrinking employment and forbidding weather, says Mr. Rosen of the University of California. Some Sun Belt cities, including Atlanta, also could languish if traffic jams and sprawl ruin their charms, he says.

Among metro areas that Mr. Rosen expects to do well in the long run are Albuquerque, N.M.; Boise, Idaho; Salt Lake City; Seattle; Portland, Ore.; Denver and Colorado Springs, Colo. He says those places generally offer "urban vitality" and "easy access to outdoor activities" combined with affordable housing and good job-growth prospects from modern industries, such as biotechnology.

Still, just looking at population trends isn't enough. Prices in the crowded coastal areas tend to be more volatile, rising and then falling much faster during booms and busts than do inland areas, Mr. Case notes. Shortages of land and building restrictions make it hard for builders to respond quickly when demand for housing rises in coveted neighborhoods near the coasts; further inland, it's usually much easier to find vacant homes or land, and so sudden movements in prices are less likely.

For instance, despite rapid growth, home prices in Texas cities have tended to climb only gradually. Those cities typically have plenty of room to sprawl, and Texas regulates land use less strictly than many other states. Supply swells to meet demand. What's more, no one can assess the outlook for housing without considering the effects of 78 million aging baby boomers. For instance, some housing experts believe the boomers will be much less likely than their parents to settle for sun and golf in their retirement; they may prefer urban settings with lots of cultural life or to live nearer friends and families. That could mean higher demand -- and increased prices -- for housing in urban neighborhoods.

Most of this is just guesswork, though. "A lot of people have theories about the baby boomers," says Mr. Frey, the Brookings demographer, but boomers always have tended to confound expectations. Dowell Myers, a professor of urban planning and demography at the University of Southern California, warns that the retirement of boomers over the next two decades is likely to depress house prices in many areas. As boomers relocate to retirement homes and cemeteries, there will be a lot more sellers than buyers in parts of the country, he says.

"It's going to really mess up the housing market," says Mr. Myers. He predicts that this "generational correction" will be larger and longer-lasting than the current slump. To get a sense of the effects of aging boomers, Mr. Myers looks at the number of Americans 65 and over per 1,000 working-age people. He sees that number soaring to 318 in the year 2020 and 411 in 2030 from 238 in 2000. Many people over 65 buy homes, of course, but as they get older they become more likely to sell than buy. People aged 75 to 79 are more than three times as likely to be sellers than buyers, Mr. Myers says.

In some areas, younger people will be happy to buy (and probably renovate) those boomer nests. The problem, Mr. Myers says, will be in places where lots of older people are selling and few young people are settling down. He says the effects will be strongest in the "coldest, most congested and most expensive states rather than the high-growth states of the South or West." Among the states where Mr. Myers sees downward pressure on prices within the next decade: Connecticut, Pennsylvania, New York and Massachusetts.

Of course, applying demographic trends to house-price forecasts can be hazardous. Economists N. Gregory Mankiw and David Weil predicted in a paper in 1989 that demographic trends would lead to a "substantial" fall in real, or inflation-adjusted, home prices over the next two decades "if the historical relation between housing demand and housing prices continues." They reasoned that baby boomers were coming to the end of their prime house-buying years and that the smaller baby-bust generation would bring lower demand for housing. That warning proved, at a minimum, premature. Despite the recent drop, the average U.S. home price is up about 35% in real terms since the end of 1989, according to the Ofheo index. Messrs. Mankiw and Weil both declined to comment.

Few people who invest in housing have time to follow these academic debates. For nearly four decades, Rich Sommer and his wife, Carolyn, have been investing in rental properties in and near Stevens Point, Wis. Mr. Sommer describes real estate as a good way "to get rich slowly." He and his wife, both former schoolteachers, gradually have built their net worth from zero to around $2.5 million through their rental properties. They have dealt with countless plumbing emergencies, evicted deadbeats and even once had to clean up after a suicide in one of their properties.

Still, he hasn't been hit very hard by the real-estate crash, in part because the Midwest is much less vulnerable to booms and busts than coastal areas. When asked what he would do if someone handed him $1 million today, Mr. Sommer doesn't hesitate: He would put it into real estate.

Christopher Judge is accustomed to turning heads in Vancouver. During the decade-long run of the cult hit TV show Stargate SG-1, which was filmed in and around the city, Judge starred as the muscle-bound alien Teal’c. But when the six-foot-three actor appeared in B.C. Supreme Court in mid-November, amid raised eyebrows from the galley, it was for a role he’d desperately hoped to avoid. Judge, who owns three luxury homes in B.C., faces foreclosure.

He’d flown up from Los Angeles the night before to ask the court for time to get a new appraisal done on one of his properties, a West Vancouver home with stunning views of the city that he’d bought for $2 million in 2006. At the same time, one of Judge’s former co-stars on the show, Michael Shanks, is facing foreclosure on another sprawling West Vancouver home purchased in January for $4 million. “I was always told the safest place for your money is in the real estate market because it would never drop by 50 per cent, but that’s exactly what’s happened,” a congenial Judge said outside the court. “I watched the L.A. housing market fall and now I’m having to watch the B.C. market go down, too.”

But it’s not just two actors on the hook. Canadian taxpayers, through the Canadian Mortgage and Housing Corp., may ultimately have to make good for any losses stemming from their woes. That’s because mortgages on at least two of Judge’s high-end properties were insured by the government-owned agency. If the foreclosures go through, and the houses are sold at a loss, lenders could turn to CMHC to make up the difference. “This wasn’t some mom-and-pop homebuyer,” says one Vancouver real estate observer familiar with the situation, but who asked not to be named. “CMHC was never supposed to be in the business of insuring speculators.”

Like Fannie Mae and Freddie Mac, the two failed mortgage finance giants that were seized by the U.S. government in September, CMHC’s primary job is to encourage home ownership by making it easier for people to obtain mortgages from banks. And over the decades, the Crown agency did just that, helping millions of Canadians buy a place to call their own. Yet there’s growing evidence that CMHC’s lax policies in recent years ignited a housing bubble in this country in much the same way Fannie and Freddie did in the U.S.

The Canadian mortgage industry may not have gone to the same extremes as in the States, and the subprime market was not as big, but experts say lending practices here were far more liberal than first thought. The question now is, will homeowners find themselves squeezed by huge debt loads and plummeting house prices? And if so, how deep will taxpayers have to dig to cover the losses?

In Canada, anyone buying a house with a down payment of less than 20 per cent must purchase mortgage insurance, which protects lenders in the event of a default. But starting in 2006 the CMHC, along with smaller private insurers, raced to loosen their standards. CMHC, with roughly 70 per cent of the market, kicked things off by offering to back mortgages with 30-year amortizations, instead of the traditional 25 years. As rivals like Genworth Financial fought back, amortizations quickly grew to 35, then 40 years.

Meanwhile, mortgages could be had with no down payment whatsoever. At the time many in the real estate industry welcomed this competitive tit-for-tat, since it helped thousands of young Canadian families who would otherwise have been shut out of the market. To others, it was a sign Canada was headed down the zany path America’s mortgage lenders had taken. In June 2006, David Dodge, then governor of the Bank of Canada, fired off a gruff letter to CMHC CEO Karen Kinsley warning the new policies were “disturbing.”

When the full extent of America’s housing crisis became apparent this past summer, Ottawa slammed the door on extreme mortgages. As of last month, mortgage amortizations were limited to 35 years, while buyers must now cough up a down payment of at least five per cent. The flip-flop, which CMHC said it supports, is aimed at preventing a real estate crisis here. But critics say the clampdown came too late. In October the average resale price of a home in Canada’s major markets fell 9.9 per cent to $281,133 from a year ago, the fifth straight month of falling prices.

“Given the highly leveraged situation of many homeowners, it is quite clear to me that we are not immune to what has happened in the U.S.,” says Moshe Milevsky, a professor of finance at York University. He says a five to 10 per cent price decline over 12 to 24 months could wipe out the equity of hundreds of thousands of Canadians who rushed to buy homes in the last few years. “Bottom line is, there are many Canadians today who own homes they should have rented instead. I’m afraid CMHC was responding to politics as opposed to prudence when they loosened their standards a few years ago.”

CMHC declined an interview for this article. In an email, the Crown corporation said it made it clear at the time that 40-year mortgages “were not for everyone.” The agency says its qualification criteria ensure that “only borrowers with the ability to manage their debts can access our products.” The agency didn’t reply to specific follow up-questions. But interviews with real estate agents, mortgage professionals and economists suggest many homeowners were able to qualify for large mortgages they might have trouble managing in the event of a downturn.

Take, for example, so-called liar’s loans. The term refers to mortgages given to people who can’t document their income. In America the practice was widely abused, since many borrowers simply lied when asked how much they earned. But such loans were available here, too. Last year CMHC trumpeted its new Self-Employed Simplified program, allowing those with no documented proof of income to obtain mortgages, provided they make a down payment of five per cent and have good credit.

The result was that in some cases those borrowers with proof of income were at a disadvantage to self-employed workers in the same industry who had no documents at all, since the latter could overstate their earnings. “It got to the point that we could actually get a larger mortgage for somebody who couldn’t prove their income than somebody who could,” says Ajay Soni, a senior mortgage broker with Invis in Vancouver. “On the whole, Canada’s borrowing culture is more responsible than in the U.S., but in some cases risk assessment was thrown out the window.”

Some suggest that’s because Canadian mortgage lenders had nothing to lose. One problem that led to America’s housing crisis was that millions of mortgages were securitized and resold to investors. This meant the companies that originally issued the mortgages to consumers with poor credit histories had nothing at stake if the loans went bad. CMHC may have played a similar role here. “The banks could write as many mortgages as they wanted, subject to being able to get them insured by CMHC,” says one prominent economic analyst on Bay Street who spoke off the record. (Several of the people Maclean’s spoke to for this article expressed concern about reprisal from CMHC, which has come down hard on critics in the past.) “The banks knew they wouldn’t be on the hook.”

Now there are concerns the sudden drop in Canadian house prices, along with rising unemployment, are proving too much for some borrowers to handle. For instance, the number of foreclosure filings in B.C.’s Supreme Court between January and the start of November stood at 928, up 50 per cent from the same period last year. Foreclosure lawyers in B.C. and Alberta have had to hire extra staff to keep up with the workload. Gloria Vinci, a Calgary real estate lawyer, says she’s been astonished to find a large number of cases where homeowners have taken out as many as four mortgages on a property in the span of three years as housing values soared. “I don’t know if this is just the beginning or we’ve reached the peak [of foreclosures],” she says. “But with the massive increase in equity over the last two to three years, people have maxed themselves out.”

Some who borrowed heavily to pre-buy during the Great Canadian Condo Boom are also struggling. Scott Hannah, CEO of the Credit Counselling Society in Vancouver, has seen cases where buyers obtained mortgages to buy condos with no down payment. As the equity in their unfinished properties rose, they took out secondary loans to buy furniture. Now those buyers are underwater, and they still haven’t moved in.

Even in Toronto, where the market run-up wasn’t as big as in the west, some owners face problems. The number of homes listed under power of sale, which refers to repossessed properties, has climbed from 300 to 500 since the spring, says Jim Common, a real estate agent whose monthly newsletter tracks the sector. It’s a small fraction of the total active listings, but he expects the number to rise.

It can take months for the full extent of a collapsing housing market to be felt. For instance, some in the real estate industry point to the relatively low default rate on residential mortgages as a sign the market remains strong. According to the Canadian Bankers Association, the percentage of residential mortgages in arrears stands at just 0.28 per cent of the total market. But when the 1990 housing bubble burst, the national default rate was also 0.28 per cent, and it took two years before defaults peaked at 0.65 per cent.

If defaults rise, claims against CMHC could climb, too. The good news is that because the buck ultimately stops with Ottawa, the country should avoid a mortgage-fuelled banking crisis like the one that has claimed so many victims in the U.S. In fact, through CMHC the federal government plans to buy up to $75 billion worth of mortgages from the banks as a way to inject liquidity into Canada’s financial system.

But could taxpayers be left holding a massive bill? There’s almost no way to know. CMHC doesn’t divulge key information about its lending portfolio, which it considers to be competitive information. Even so, Nick Rowe, an economics professor at Carleton University, recently posted online a “back of the envelope” calculation of CMHC’s potential losses. Based on what is known about the agency’s $334-billion insurance portfolio and $7 billion in reserves, he argued CMHC could lose $9 billion if prices in Canada fall as much as they have in America. (U.S. prices have dropped 20 per cent from their 2006 peak, with some cities down 35 per cent.) By contrast, CMHC posted profits of more than $1 billion for three straight years, thanks largely to insurance premiums it charges homebuyers. Rowe admits his analysis is crude. But he worries CMHC officials may not have accounted for serious price declines when constructing their financial models, believing, as Fannie and Freddie did, a catastrophic economic event would never happen.

For what it’s worth, CMHC remains more optimistic about the Canadian market than some of the real estate industry’s most bullish proponents. On Oct. 30, CMHC predicted the average MLS selling price for this year will come in higher than last, and continue to rise in 2009 to $306,700. A week and a half later, the Canadian Real Estate Association predicted the average price of a Canadian home will end the year down 0.6 per cent to $303,900 from 2007, and continue to fall in 2009 to $297,600. “Somebody needs to work out what the losses for CMHC would be if house prices fell 20 per cent across Canada,” says Rowe. “We’ve got a rough idea of the national debt, and what the deficits are going to be, but there’s an item here that hasn’t been taken into account. There’s no question of anything going bust, but this is something we should know. It’s very clear who is on the hook here, and that’s the taxpayer.”

No one is saying this is all CMHC’s fault. Genworth, Canada’s second-largest mortgage insurer, moved in lockstep with its government-backed rival. Meanwhile, smaller U.S. mortgage insurers rushed into the Canadian market at its peak. (Almost all have since fled Canada.) And CMHC didn’t exactly hold a gun to the head of lenders, who were the ones actually doling out questionable loans at the outer limits of CMHC’s insurance policies.

Still, at the end of the day, CMHC isn’t a private company, which means taxpayers may have to write a sizable cheque if the housing market worsens. It’s happened before. Back in the early 1980s Ottawa had to bail out CMHC when thousands of homeowners defaulted on their mortgages and insurance claims skyrocketed. Much has changed since then, but it’s becoming clear that CMHC’s policies encouraged many homebuyers to jump into the market before they were ready. And the consequences of that could be far-reaching. “[The easy credit] dragged buyers kicking and screaming from the future to today and they were lent money whether they could afford it or not,” says Ozzie Jurock, a Vancouver real estate promoter. “The only test was whether they could breathe.”

59 comments:

Another great piece by Ilargi, drawing the strings together for everyone to see.

When he says the following, Canada is no doubt included: "Other, more established, export powers to meet the hammer are for instance Germany, Holland, Brazil, Austria, Belgium and Australia. Job losses will be staggering, and I don't see any of these places seriously preparing for it."

Kudos, OC, for putting together two huge posts in two consecutive days.

I was boggling over the "Future of Home Prices" bit- so utterly out of touch with all reality- until I did finally click on the link- Oh, it's from the Wall Street Journal! That would explain it. Hilarious!

Many thanks to OC from me as well. Keeping the site going with Ilargi only intermittently around would be impossible without him. Kudos to the rest of the team as well for delivering all the research - you are all very much appreciated.

Dan- (and Ilargi) "No sir, Mr. Obama. This is not a slow down. This is not a contraction. This is not a market correction. This is an economic disaster of epic proportions. This is to the 1930s what an F5 tornado is to an afternoon thundershower. An umbrella will not shield you from this storm sir."

I realize I may be swimming upstream here- but- something you must keep in mind, when listening to Obama's public statements- he is NOT talking- to YOU.

He's talking to the existing power structure. For specific reasons.

Now- I do not know that Obama is as bright as I hope he is, but I have not lost hope yet. In fact, his actions so far are consistent with the real world needs of a politician- to appease certain powers, and consolidate actual power. Sure, he got himself elected; but how much genuine power does he have yet? Not so much.

I'll remind you of my prediction back there, that I expected him to do something rather spectacular to win some support from the military. It's subject to debate, but I think he has done it; in the retention of Gates as Sec. of Defense. That's a pretty big deal- to leave a Bush appointee in place. Thing is; Gates is mostly respected by the military- and they were afraid of some wacko Democrat know-nothing being appointed- so what Obama did was say "I trust you; as you are." A very powerful way to win THEIR trust, and respect.

I'm still hoping he's much smarter than most people realize- and no, he's not telling everybody what he really thinks. He's working in the real world. Where JP Stanley Group can still pull the rug out from under you, if they want to.

6 months from now - when we are in MUCH more trouble - he may have the power, and credibility, to say - "ok, we tried the old way; really did; now we have to try something new..."

I don't think he could get away with that, today. Too few people actually see how bad it's going to be. Yet.

In the small town where we lived when I was a kid (mid 50s) buying a car went like this:

You went to the dealership, which was a large storefront with a showroom, an entrance to the garage on the side and a small lot for used cars next door or across the street. In the showroom there were two or three new cars, usually the high end models. You sat down with the salesman, he pulled out his order book, and you wrote up and priced the car you wanted. Then came the dickering over the price and trade in. Once that was done, the order was placed and 6 to 8 weeks later you went back to the dealership to pick up your new car and hand over your trade.

Maybe this is another business model that will be reborn, rather than the current one of several acres of new cars sitting around with attendant flooring costs. No instant gratification, but that may be a thing of the past anyway after reading Ilargi's post today.

Ilargi said: "I for one do remember Hillary's war-mongering rhetoric, and no, she does not belong where she is right now. The world we're entering will be far too volatile for someone so obviously suffering from a severe case of estrogen imbalance."

A sexist comment, Ilargi? Why single out estrogen imbalance? Males and females both go through menopause, as you know. Most American war-mongering politicians are older fellows suffering from testosterone imbalance?

BTW, I'm definitely not a fan of Hillary Clinton or her war-mongering tendencies.

I keep wondering how much of these national Keynesian-type "infrastructure" stimulus plans will be aiming road repair and expansion on the (incorrect) assumption that individual auto use will remain paramount and possibly increase after the (incorrectly) assumed post-recession boom.

"It's a good idea to assess the long-term career impact of toiling for less. Younger individuals, for instance, might get a valuable opportunity to build their résumés. That proved true for Sanjay Gupta. In 1994, the 26-year-old senior marketing analyst accepted 10% lower pay when he transferred to a database marketing job at his employer, FedEx Corp. He and his wife were forced to dine out less often. However, Mr. Gupta says that he gained experience "with every facet of marketing," a critical skill for becoming a chief marketing officer of a big business some day. He achieved that title last March, when GMAC Financial Services named him CMO."

"Nick Rowe, an economics professor at Carleton University... worries [Canada Mortgage and Housing Corporation] officials may not have accounted for serious price declines when constructing their financial models, believing, as Fannie and Freddie did, a catastrophic economic event would never happen."

“Iceland is more or less in a state of coma,” said Sigrun Thormar, who runs a consulting business for Icelanders moving eastward. “There’ll be an increase in the number of Icelanders seeking work in Denmark.”

And it was certainly mentioned throughout his campaign in both the primary and the general. I woul;d garner to guess that even the NEBR was was in the early stages of getting all their data together in March or April that they would have most likely used the same terminology then also.

Greenpa, excellent thoughts about Obama. I've had the same feelings myself, but couldn't express them so articulately. Obama is a pragmatist, not an ideologue. He realizes that the systemic change that needs to take place will extend far beyond his tenure in office. Hopefully, he can be a bridge builder from debt-based corporate capitalism to sustainable economy.

Hillary is a power hungry bitch, and dangerous in a non-feminine way. That says nothing bout my view of women in general, I love them as many can attest.

Obama lovers:

He's made all the wrong choices so far, one on one after another, and you'd like me to believe that at some -near- point in the future there'll be some miraculous 180? He'll get rid of Summers, Geithner, Rubin, Gates and Clinton in one fell swoop?

I see that a lot of folks are saying that Obama is just playing the game he needs to play until he's fully installed in power, then of course he will pull of his mask or something. I want to hope for the best, too, but that's some pretty delusional thinking going on there.

you have to sell your soul to "win" the post of president in the US. He is so beholden to oother interest that he has very little real power. Its not just obama, any one who wins that post must make the same sacrifice.

brimstone: "you have to sell your soul to "win" the post of president in the US."

Just casually interested here; are you saying you know of somewhere on this planet where that is NOT true?

All politicians have to play the game. Always. Nonetheless, some have been quite a lot better than others. A few have actually honestly tried to do the right thing. But they still have to stay in the game.

It seems to my mind that much of the global problem that we face is caused by the rapid and recent push towards globalization.

Having the world as a community of nations is likely more workable than having it as global conglomerate with nation states.

The picture in my mind is of a school bus rushing down a mountain trying to get away from an erupting volcano. Each of the occupants are the countries of the world and the erupting volcano is the great debt deflation.

I think we can guess who the driver is .... US Fed/City of London/Global Bankers.

Now too bad if you are car sick or need a bathroom, the good of the whole is more important than the needs of the individual. However keep in mind that each individual on the bus is actually a country of millions of people.

Now if some of these people got off the bus, used a restroom and then grabbed a fast car, they could travel in more comfort and end up well ahead of the bus if they drive smarter and faster.

What happens if the bus doesn't make it?

I think the answer is going to be with well prepared individuals, who inspire well prepared small communities, who support an efficient local business sector, who influence local/state and maybe federal governments.

We can't fix the global economy, but maybe we can fix ourselves, our family, our neighbourhood, our workplace. If we can fix those then maybe the rest will be built up again over time.

The most important thing that governments should be doing is identifying businesses that can survive and supporting those.

I am hoping your prediction of the shelves being bare too soon is wrong...but on that note...

We have a large retailer up here Fred Meyers.Mid to upper level grocery,and consumer electronics ect.I went black friday for some other odds and was stuck by how little was available for sale...like no where near the usual piles and piles of goodies of every description....lodes of buyers...little to sell .Lots of handbags and clothes...little electronics comparatively

I don't know if this was local or just a small taste of whats coming...it will depend on how stocked things are in 2 weeks that will trigger awareness I think.I want at least 3 more months of peace..please.No one is ever "ready' for this type of coming parade,but one may be ready-er.

I have just ordered my first cheap specs online...we will see how this goes...

I hope the powers that be understand the quiet rage I have seen in the hearts of many.I interact with many,many working folks in my profession,and the uniform anger..quiet white-hot rage I see boiling just beneath ,just in the day to day, is something else.A joke,a wisecrack,and suddenly its there,and voices raise,and seething anger boils up again,out in public ,for all to see.

I have never seen this before.Ever.

Its a dark anger I have never seen toward those who mis-used their position and place...to loot and pillage like a common thief.

If those running this administration are wise they will pick a few[quite a few]of the most vile,wealthy, egregious sort and hang them high.Scapegoats are useful in quieting a public who will see many things ,now, here, that are common "over there".

I am about to see my first real income since June of 2007. I hope it holds together a bit in my sector ... the move to renewable energy seems timely. Things are getting ugly ... my girlfriend losing her job, all of my IT friends are laid off (hi, Bryan!) ... I've had all the knowledge to prepare, plenty of time, and no money and now that it's here I start getting paid again. This sucks ...

Just discovered this in my email ... very appropriate to my earlier comments.Finally, a definition of globalisation I can understand and to which I can relate .

Question : What is the truest definition of Globalisation?

Answer : Princes Diana's death.

Question : How come?

Answer : An English princess with an Egyptian boyfriend crashes in a French tunnel, driving a German car with a Dutch engine, driven by a Belgian who was drunk on Scottish whisky,followed closely by Italian Paparazzi, on Japanese motorcycles; treated by an American doctor, using Brazilian medicines.

This is sent to you by An Aussie, using Bill Gates's technology, and you're probably reading this on your computer, that uses Taiwanese chips, and a Korean monitor, assembled by Bangladeshi workers in a Singapore plant, transported by Indian lorry-drivers, hijacked by Indonesians, unloaded by Maltese wharfies, and trucked to you by a fleet of Pakistani drivers fuelled by the Netherlands, wearing safety clothing made in China.

Recently came upon this site and found it very interesting.Regarding Obama, he is the leader of the Democratic Party which is part of the status quo. Those that vote for either major party are voting for status quo so no surprise in any of his picks including Defense.Believe President Clinton did the same naming a Republican to Defense at one point, just shows how little will change at the Defense Dept. Doesn't take much to show improvement after Bush but real change, don't think so!

Interesting that Canada's parliament may be prorogued until late January. Seems that nobody wants to be running Canada during Ilargi's 'window of opportunity' for at least one of the Big Three to go bankrupt.

In all the discussions here, there seems to be a quaint, almost charming, implicit assumption the nation-state as the primary organisational unit will not only remain intact but functional. That’s an assumption I think many of us might want to begin to reconsider.

The nation-state’s half of the social contract is becoming less and less fulfilled. Throughout the world we see crumbling infrastructure, failing welfare systems, privatisation of essential public services such as water, the list goes on. As the capacity of the nation-state to fulfil its part of the social contract continues to decrease, the willingness of the citizen to support the nation-state will decrease. We’ll see the rise of non-state actors that can and do provide some of the services citizens have come to expect. This is a fundamental part of the rise of groups such as Hezbollah in the Lebanon. In the vacuum they have risen to the challenge and now act as the purveyor of at least the part of the social contract Beirut can no longer fulfil. We’re only at the beginning of this process and we can expect to see many more hollow or failed nation-states fracturing along the lines of what John Robb refers to as “primary loyalties.”

The decline and fall of the nation-state, at least in the form we think of it today, is one of the reasons I am not particularly worried about “intergenerational taxation.” Within a generation or two taxation and the provision of services they fund may not even be within the capacity of the nation-state. There are very few homogenous nation-states, Japan being an obvious exception. The rest will see rising internal tension as they begin to fracture along primary loyalties. These fractures will spill over into neighbouring nation-states as the arbitrary borders succumb to the reuniting of primary loyalties that have been separated only by decree, fiat, if you will.

In this light I, for one, am expecting an exponential rise of both failing nation-states and the non-state actors that will begin to replace them and their functions. In this sense, it augers well for the rise of the local and the regional (however one wants to define them) even as the national and supranational become less and less functional eventually to fade out of all but the history books.

@ goritsas RE: "...As the capacity of the nation-state to fulfil its part of the social contract continues to decrease, the willingness of the citizen to support the nation-state will decrease...."

While I somewhat agree with your analyses regarding the failure of the nation-state and possible outcomes, IMO your statement above is missing a critical piece. You have drawn a direct cause-and-effect line, if you will, that I think is far FAR more complex and difficult to predict. for example:

The nation-state CAN use censorship, propaganda, coercion, etc. to manipulate the population into either silent compliance OR unknowing support---even if/when the nation-state fails to hold up its end of the 'bargain' time and time again. Look no further than Stalin's Sovietism or Il's N. Korea to corroborate my argument (some would even posit that the current USA falls into the same category)

What you are talking about here ties in with the crisis of legitimacy that has been a common discussion point here, and with my concern over much greater centralization. A nation state less and less able to deliver on the social contract loses legitimacy rapidly and must therefore resort to more coercive methods in order to maintain control over an increasingly unruly population. IMO as this dynamic unfolds (and it is set to accelerate sharply over the next couple of years) we are witnessing a transition towards tyranny in some form.

Like everything in our society, our system of governance has become hollowed out - bloated on the surface yet able to achieve very little at huge cost. Naomi Klein did a wonderful job of describing government-by-unaccountable-contractors in The Shock Doctrine, pointing out that the US government in particular has become little more than a mechanism for transferring vast sums of public funds into private hands through contracts that deliver little if any value, yet receive virtually no oversight.

Democracy has been on life support for a long time already. Although the form of the institutions remains, their function has been increasingly subverted over the years, so that politics has become more of an exercise in prole-feed as infotainment rather than informed civic choice.

Unfortunately, this is part of the life-cycle of empires. Their early vitality eventually gives way to a schlerotic endgame, while a new power eventually rises elsewhere. Humanity will never achieve stability. It is simply not in our nature. We, and are societies, are born, we live and we die in long cylces of rise and fall, from dynamism and effectiveness to despotism and decay.

Well put. interestingly, the American empire's decline after "only" 200 years reflects the hyper-annuated and exponentiation of everything really. And since the rise of the US Empire, graphically speaking, was so steep, its fall will be no less precipitous. I recall taking a class at Harvard Summer School back, yipes, in 1981? The prof. was a guy named Dov Ronen, and we spent a lot of time discussing the increasing gap between humans as biological entities and the growth of technology. It was his view that the whole thing must collapse because as the gap widens, humans can no longer "control" the technology---in effect, the technology controls THEM.

I agree that democracy has evolved into the skin-on-the-teeth version, not the blood and guts. and as such, the fraud is devastating.

"Stocks to Rise in ’09, UBS Says; S&P 500 May Gain 53% (Update2) Global stocks will withstand a “full-blown” recession and surge in 2009 as cheap valuations and efforts by governments to restore confidence in the financial system lure investors back to equities, UBS AG said."

Now if they had predicted 54% I would dump T-Bills and leverage long :-) As a turkey buzzard, I know a turkey when I see one. These assholes have no shame. I hear sales of pitchforks have risen 53% in Switzerland this year.

"The US military expects to have 20,000 uniformed troops inside the United States by 2011 trained to help state and local officials respond to a nuclear terrorist attack or other domestic catastrophe, according to Pentagon officials."

YES, the RATE peaked at 11,750 and is now at 672, but the number quoted by Ilargi is a conversion of rate to $$$.

"...At the peak of the market, a 170,000-tonne Capesize bulk carrier was hired out at the eye-watering daily rate of $234,000. At the beginning of this week, it was $5,611 – a fall of nearly 98 per cent..." (The Independent)

"Humanity will never achieve stability. It is simply not in our nature. We, and our societies, are born, we live and we die in long cycles of rise and fall, from dynamism and effectiveness to despotism and decay."

Yes, societies will never achieve stability. Collectively, we humans don't evolve enough to achieve positive and effective societal change. But even though societies cannot achieve stability, individuals can. Individuals have the potential to grasp the cycle of existence. Individuals have the potential of becoming more spiritually beautiful before physically decaying.

Stoneleigh, can you expand on your statement about empty shelves in January? Will this be across the board or just foreign made products? Also, is there something event that will trigger this or is it just a consequence of the credit crisis?